What is SENSEX? Here Is an Easy Way to Understand It
The entire mutual fund industry has experienced a significant upsurge as it has recorded a vast number of investments in recent years. Diving more into the facts, it is equity category which has grabbed the attention of the horde and recorded millions in terms of investments.
However, we have noticed that many of the newly entered investors are facing difficulties in understanding some of the basic things in their investments. Although there are experts to guide you through your investment, you can also take care of some of the minor aspects on your own. Today, we will teach you about the indexes of the market which many people see daily but unfortunately, least know about them exactly.
What is Market Index?
A market index is a measurement which depicts the changes in the overall stock market scenario of a particular category of stocks. In more simple words, it shows the aggregated value of the stocks which are listed under it, and thus depicts the changes in that particular market. There are various indexes for different categories of stocks. In India, there are mainly two indexes which are SENSEX and Nifty.
What is SENSEX?
SENSEX, also known as Sensitive Index, is a market-weighted stock index and depicts the aggregated performance of the 30 companies which are selected on the basis of their financial soundness and other such factors. SENSEX is the stock market index for Bombay Stock Exchange, i.e., BSE, it is also known as BSE SENSEX.
Here are the companies which are listed in SENSEX:
BSE introduced Sensex on January 01, 1986. It is the most prominent stock market index in India and shows the aggregated scenario of the most popular, large, and financially sound companies. Its base year for SENSEX is 1978-79 and the base value for that period is 100 points.
What is Base Value and why is it set to 100 points?
At the time of index construction, the total value of shares in the market was assumed to be 100 in terms of ‘points’ so that to simplify the calculation. Moreover, to logically represent the changes in terms of percentage. Thus, the change in the value of the market capitalisation by 10% up also makes the index to move from 100 to 110 with an increase of 10%.
Here is how SENSEX has performed since inception:
In the figure, as shown above, you can easily see how SENSEX has performed since its inception. The latest value of it has been recorded at 33,359.90 as on November 20, 2017.
How is SENSEX calculated?
As we have already discussed that Sensex is constituted of 30 companies’ stocks, we will calculate the Sensex based on the capitalisation of those 30 companies. But, it is not that easy because before that we need to calculate the free float market value of these stocks. For this, first you need to understand what is free float market value of stock.
Free Float Market Capitalisation:
The total number of shares which are open for subscription or are available for the public to trade in the market comes under free float market capitalisation. More clearly, all shares of any company may not be free floating. Some of them may be held by the owners, government bodies, or the insiders. Other than those holdings, the remaining portion is free for public subscription, and the value of these open-ended shares are known as free float market capitalisation. Let’s understand how free float capital is calculated:
To calculate the free float market capitalisation of a company, first of all, you need to find the total capitalisation of the company and then its free float factor which can be determined by calculating the percentage of the floated shares of the outstanding. Suppose, the total market capitalisation of a company is Rs. 12,000 crore of which capital Rs. 10,000 crore is floated to the public for subscription. The percentage of floating capital to the total capital is 83% which falls under the free float factor slab of 80-85%. It means that the free float factor is 85% or 0.85. So, the total free float market capitalisation of this company is Rs. 10,200 crore (12000*85%). This way, the free float market capitalisation of all the companies listed under the SENSEX is accumulated.
Now, the free float market capital of all the companies will be accumulated together and divided by an index divisor to get the Sensex value.
Henceforth, we feel that you have understood the concept and importance of Sensex in your mutual fund investment. In one line, it is the index which gives you an idea of the aggregate performance of the overall stocks in the market. We will be back soon with our next blog on “What is Nifty?” to help you enhance your knowledge in understanding the concept and importance of Nifty. Therefore, keep checking our daily blogs and news section to know more about the mutual fund industry and investments. We, at MySIPonline, always try to provide you with the best of everything.
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