What’s SENSEX?

SENSEX is the short form of The Bombay Stock Exchange Sensitive Index. A sweet short name
for a long boring name.
It’s a benchmark – it shows the health of the share market. If it goes down, it means that the
market is going down (Bear market) and if it goes up, the market is going up (Bull market).
Therefore going up is a good sign – it means that you’ll get more price for the shares you have.

What does it capture?

It captures the movement of the share prices. A rising SENSEX means share prices are going up,
as told earlier. Plus it also means that companies are doing well and shareholders will be earning
more from their shares.
In overall, it also reflects the condition on the Indian economy. Why? Because if companies do
well, it augurs well for the Indian economy too.

How the SENSEX is calculated?

Ø The SENSEX is calculated on the basis of 30 biggest shares.

Ø These shares make more than 50% of the total market capitalization in the
BSE market.
Ø They are the most traded ones, obviously because market cap is high
Ø They represent in all 13 sectors of the economy – all the companies are
leaders in their respective fields.
There is a committee – the Index Committee who selects these shares. The committee consists
of experts in share markets. They modify the SENSEX at regular intervals.

SENSEX uses free-float market capitalization. Now what’s that? Market cap you already know. It’s simply the
value of the company calculated by (share price * number of shares in the market). Free float means that
these shares are open for everyone to trade. They are open to the general public.

Again a question: can shares be closed too? Yes, some shares may be held by the
owners/founders/directors/employees of the company, some may be by the government or FDI.
These shares are kind of closed as no one can sell/buy them in the market. These kinds of shares
are not used in calculation of SENSEX.

The criteria for selecting these shares is a bit complex. Any share can’t into these elite 30.

Ø The shares should have been bought/sold everyday for the past one year –
this ensures that the selected shares are the most happening ones.
Ø The shares should be among the top 150 shares in average value (buy/sell).
Ø The shares should be listed in BSE for more than a year.
Ø The company should be a trusted one and be leaders in their own field.
This ensures that there’s no black sheep among the 30 selected. To see the listed companies click
here.
Why do SENSEX go up and down?

As the company’s performance change the shares go up or down. If the company is doing well or
some news come that it will do well in future, SENSEX will go up. If there’s a bad news, SENSEX
will go down.
Moreover, if there’s some positive news about the country like India becoming a nuclear power,
SENSEX will go up because India’s economy is going up.
So both companies and the country are responsible for the SENSEX movements.
SENSEX is a general index, there are other specific index too. We’ll discuss it sometime later.

How to read the SENSEX?

The base year of the SENSEX is 1978-79 and base value is 100. Actually it means calculations
start with taking 1978-79 SENSEX as 100 and then if today’s SENSEX is 12009.59 means that
the market value has increased to more than 120 times.

Now look at the daily SENSEX

It will show you the variation in SENSEX value from the start of the day to the end. Here you see
that the index started on a low note, then went up, came down and again went up and down.
This zig-zag motion continues the whole day. Day wise is more important for share market
players who play in millions of Rs.

For slower investors like us, the month-wise index is more important than day-wise.

Here you see that during May-July the SENSEX went down and then again it recovered to go up.
Still it is higher than Nov 05. That means if you had bought a share in Nov, you would have got
more price this year. It also shows that the SENSEX is on the up. Buy shares whenever the
SENSEX is going down and sell them when SENSEX is going up.
This 5 year one will show you what I mean. See from 2002 onwards hardly SENSEX has ever
touched that low – it’s on the up!! Given the predictions, it will be up for a long long time as the
India is emerging as an economic superpower.
This is the primary knowledge you need to know. There are thousands of indices on SENSEX. I’ll
discuss those in details sometime later.
Now another important issue: about the company SENSEX values.
STATE BANK O (Bombay:600112.BO) Delayed quote data
Last Trade: 1,175.60 Day's 1,175.60 -
Trade Time: 10:18AM IST Range: 1,175.60
199.10 52wk
Change: N/A
(20.39%) Range:
Prev Close: 976.50 Volume: 26,460
Open: 1,175.60 Avg Vol(3m): N/A
Bid: 1,175.60 Market Cap: N/A
Ask: 1,038.50 P/E (ttm): N/A
1y Target EPS (ttm): 0.00
N/A Div & Yield: (N/A%)
Est:

Now this table on SBI show that SENSEX on last trade and the change over last day’s price.
Previous day’s closing SENSEX was 976.5 and hence there’s a 199.10 SENSEX value change. For
SBI the data on Market cap are not given otherwise you could have calculated the price of each
share simply by dividing market cap by volume.
From the SENSEX value you can understand the value of a share. Thumb rule of it is any SENSEX
you see over 100 means it is a high value share. The company is quite a biggie and a happening
one.
This table shows the contributions of different companies to the SENSEX

Group No. of companies in the Contribution to SENSEX

group

FMCG stocks 4 88
(Colgate, Lever, ITC, Nestle)

New Economy stocks 4 140

(Infosys, NIIT, Satyam, Zee)

Pharma stocks 4 19
(Dr.Reddy, Glaxo, Novartis,
Ranbaxy)

Cement stocks 2 6
(ACC, Guj.Ambuja)

Bank stocks 2 23
(ICICI, SBI)

Auto stocks 3 13
(Bajaj, M&M, Telco)

Reliance Group stocks 2 46

(Reliance, Rel. Petro.)

Other stocks 9 55

TOTAL 30 390

Source: rediff.com

By this you can understand the most valuable shares. Try to buy shares those have a higher
contribution to SENSEX, that will ensure that share price won’t go down very quick and you won’t
loose money easily.