BSE Sensex an Overview – How it is Calculated with Analysis
BSE Sensex an Overview: The SENSEX, short form of the BSE-Sensitive Index, is a Market Capitalization-Weighted index of 30 stocks representing a sample of large, well-established and financially sound companies.
BSE Sensex an Overview
It is the oldest index in India and has acquired a unique place in the collective consciousness of investors.
The index is widely used to measure the performance of the Indian stock markets.
SENSEX is considered to be the pulse of the Indian stock markets as it represents the underlying universe of listed stocks at The Stock Exchange, Mumbai.
Further, as the oldest index of the Indian Stock market, it provides time series data over a fairly long period of time (since 1978-79).
The SENSEX is the benchmark index of the Indian Capital Markets with wide acceptance among individual investors, institutional investors, foreign investors and fund managers.
The objectives of the index are:
* To measure market movements
Given its long history and its wide acceptance, no other index matches the SENSEX in reflecting market movements and sentiments.
SENSEX is widely used to describe the mood in the Indian Stock markets.
* Benchmark for funds performance
The inclusion of blue chip companies and the wide and balanced industry representation in the SENSEX makes it the ideal benchmark for fund managers to compare the performance of their funds.
* For index based derivative products
Institutional investors, money managers and small investors all refer to the SENSEX for their specific purposes The SENSEX is in effect the proxy for the Indian stock markets.
The country’s first derivative product i.e. Index-Futures was launched on SENSEX.
1. Market Capitalization:
The scrip should figure in the top 100 companies listed by market capitalization.
Also market capitalization of each scrip should be more than 0.5 %% of the total market capitalization of the Index i.e. the minimum weight should be 0.5 %%.
Since the SENSEX is a market capitalization weighted index, this is one of the primary criteria for scrip selection.
(Market Capitalization would be averaged for last six months)
(i) Trading Frequency: The scrip should have been traded on each and every trading day for the last one year.
Exceptions can be made for extreme reasons like scrip suspension etc.
(ii) Number of Trades: Number of Trades: The scrip should be among the top 150 companies listed by average number of trades per day for the last one year.
(iii) Value of Shares Traded: Value of Shares Traded: The scrip should be among the top 150 companies listed by average value of shares traded per day for the last one year.
Whenever the composition of the index is changed, the continuity of historical series of index values is re-established by correlating the value of the revised index to the old index (index before revision).
The back calculation over the last one-year period is carried out and correlation of the revised index to the old index should not be less than 0.98.
This ensures that the historical continuity of the index is maintained.
4. Industry Representation:
Scrip selection would take into account a balanced representation of the listed companies in the universe of BSE.
The index companies should be leaders in their industry group.
5. Listed History:
The scrip should have a listing history of at least one year on BSE.
In the opinion of the Index Committee, the company should have an acceptable track record.
Beta of SENSEX scrips:-
Beta measures the sensitivity of a scrip movement relative to movement in the benchmark index i.e. SENSEX.
- A Beta of one means that for every change of 1%% in index, the scrip moves by 1%%.
- Statistically Beta is defined as: Covariance (SENSEX, Stock )/ Variance(SENSEX)
Note: Covariance and variance are calculated from the Daily Returns data of the SENSEX and SENSEX scrips.
SENSEX is calculated using a Market Capitalization-Weighted methodology.
As per this methodology, the level of index at any point of time reflects the total market value of 30 component stocks relative to a base period.
(The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company).
An index of a set of a combined variables (such as price and number of shares) is commonly referred as a ’Composite Index’ by statisticians.
A single indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over time.
It is much easier to graph a chart based on indexed values than one based on actual values.
The base period of SENSEX is 1978-79.
The actual total market value of the stocks in the Index during the base period has been set equal to an indexed value of 100.
This is often indicated by the notation 1978-79=100. The formula used to calculate the Index is fairly straightforward.
However, the calculation of the adjustments to the Index (commonly called Index maintenance) is more complex.
The calculation of SENSEX involves dividing the total market capitalization of 30 companies in the Index by a number called the Index Divisor.
The Divisor is the only link to the original base period value of the SENSEX.
It keeps the Index comparable over time and is the adjustment point for all Index maintenance adjustments.
During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX every 15 seconds and disseminated in real time.
How is the closing Index calculated:-
- The closing SENSEX is computed taking the weighted average of all the trades on SENSEX constituents in the last 15 minutes of trading session.
- If a SENSEX constituent has not traded in the last 15 minutes, the last traded price is taken for computation of the Index closure.
- If a SENSEX constituent has not traded at all in a day, then its last day’s closing price is taken for computation of Index closure.
- The use of Index Closure Algorithm prevents any intentional manipulation of the closing index value.
With what frequency is SENSEX calculation done:-
During market hours, prices of the index scrips, at which trades are executed, are automatically used by the trading computer to calculate the SENSEX every 15 seconds and continuously updated on all trading workstations connected to the BSE trading computer in real time.
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