SeNSeX DeMyStiFiED

Everyone has heard of the Sensex. Most of us know it is the index of the Bombay Stock Exchange. But there are lots of facts you are probably unaware of. Here are some interesting facts about the Sensex.

1. The Sensex is made up of only 30 stocks: These stocks represent around a dozen sectors. They are leaders in their respective industries.

2. The stocks are picked by the stock selection committee (known as the Index Committee).

There are certain basic parameters fixed when picking these 30 stocks. They are:

·         The stock should have been listed and traded on each and every trading day for the past one year.

·         It should be among the top 150 companies listed by

-       average number of trades (buying or selling of shares) and

-       the average value of the trades per day over the past one year.

The list of companies included in the Sensex is not permanent and the list is revised continuously based on the above criteria. For eg. Tata Power Co. ltd replaced Cipla ltd. on 28^th Aug 2008.

3. The job of the Sensex is to capture the price movement of the equity market.

The Sensex reflects the price movements of shares. If the Sensex rises, it indicates the market is doing well.

The price of every stock price rises or falls for two possible reasons:

News about the company

Great earnings, great annual or quarterly results, product launch, closure of a factory, the government providing tax or duty exemptions to the sector so more profits expected, a feud among the company's top bosses, etc. This is called stock specific news.

News about the country

Testing a nuclear bomb, a terrorist attack, the Budget announcement, new tax regime, declaration of war, change of government, good monsoons and hence a good agricultural crop, etc. This is called index news.

Global Cues

Movement of other stock exchanges world wide, U.S. sub prime crisis, bankruptcy of Lehman Brothers etc.

The job of an index is mainly to capture the news about the country. This will reflect the movement of the stock market as a whole. It could also reflect the sentiment of the market as a whole. If corporate India is largely doing well, then it will get reflected here.

4. How is Sensex Calculated?

Each of the 30 stocks in the Sensex has a weight attached to it. This weight depends on the market capitalisation of the stock.

There are two methods to calculate the market capitalisation:

Full Market Capitalisation Method

Full market capitalisation refers to the total number of shares of a company is multiplied by the market price.

Free-float weightage

In case of free float weightage only the shares that are available for trading (some of the shares issued to the promoters or government are not allowed to be traded) is multiplied by the market price.

Let us take an example:

Assume a company X with following share holding pattern

Shares Held by	No. of Shares	% of holding
Promoters	200000	50.00%
Institutional Investors	100000	25.00%
General Public	100000	25.00%
TOTAL	400000	1

 

Assuming the Market Price per share is Rs. 20

 

Under Full Capitalisation Method

 

Total Market Capitalisation = Rs. 400000 x 20

                                                   = Rs.8000000

 

Under Free Float Weightage Method

 

Total Market Capitalisation = Rs. 200000 x 20

                                                   = Rs.4000000

 

Note: 200000 shares held by promoters is not taken into account

 

This calculation is done every 15 seconds in a trading day

 

 The Sensex uses the free-float weightage method whereas S&P CNX NIFTY uses Full Capitalisation Method

Till 1^st September 2003 the value of Sensex was also computed on the basis of Full Capitalisation method