BSE Sensex index: Explained | TIOmarkets
BY TIO Staff
|July 1, 2024The BSE Sensex index, also known as the S&P BSE Sensex, is one of the most significant stock market indices in India. It is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE).
The index is designed to reflect the overall market sentiments and trends, making it a vital tool for investors, traders, and market analysts. This article provides an in-depth understanding of the BSE Sensex index, its components, calculation, significance, and impact on the trading market.
Understanding the BSE Sensex Index
The BSE Sensex, short for Bombay Stock Exchange Sensitive Index, was introduced in 1986. It is the oldest stock index in India, representing the country's most liquid and large-cap companies across key sectors. The index is used to measure the performance of these companies and provide a benchmark for investors and market intermediaries.
The Sensex is often considered the pulse of the Indian stock markets, reflecting the health of the economy. It is a barometer of market behavior and is often used to compare the returns on specific investments.
Components of the BSE Sensex Index
The Sensex comprises 30 companies from a range of industries, including IT, banking, automobile, pharmaceutical, and others. These companies are selected based on free-float market capitalization and other criteria such as financial stability, liquidity, and industry representation.
Some of the prominent companies included in the Sensex are Reliance Industries, HDFC Bank, Infosys, ITC, and Tata Consultancy Services. The composition of the Sensex is reviewed semi-annually by the Index Committee of the BSE.
Significance of the BSE Sensex Index
The BSE Sensex is a crucial indicator of the Indian economy's health and the broader Asian market. It reflects the market's overall mood, with a rise in the Sensex indicating positive investor sentiment and a fall indicating negative sentiment.
Furthermore, the Sensex serves as a benchmark for fund managers to compare the performance of their investment portfolios. It also provides a platform for the launch of index funds, exchange-traded funds (ETFs), and structured products.
Calculation of the BSE Sensex Index
The calculation of the Sensex is based on the 'Free-float Market Capitalization Weighted' methodology. This methodology considers the free-float market capitalization of a company for the purpose of index calculation.
Free-float market capitalization is the multiplication of the share price and the number of shares readily available for trading in the market. It does not include promoter's holding, government holding, strategic holding, and other locked-in shares that will not come to the market for trading in the normal course.
Base Year and Base Value
The base year of the Sensex is 1978-79, and the base value is 100. This means that the total market capitalization of the 30 companies during the base period is assumed to be 100. The current index value is then expressed as a multiple of the base period market capitalization.
The index value provides a measure of the total market value of the 30 constituent companies relative to a base period. An increase in the index value represents a rise in the total market value of these companies, and vice versa.
Divisor Adjustment
The Sensex is calculated using a divisor, which is adjusted for corporate actions such as stock splits, bonus issues, rights issues, and other similar events. The purpose of the divisor is to ensure that such corporate actions do not affect the index's continuity.
When a company listed on the Sensex undergoes a corporate action, the divisor is adjusted so that the index value remains constant. This ensures that the index reflects only the market movements of the constituent stocks and not the changes due to corporate actions.
Impact of the BSE Sensex Index on Trading
The BSE Sensex plays a significant role in trading decisions. Traders use the Sensex as a barometer of market sentiment and base their trading strategies on its movements. A rising Sensex could indicate a bullish market, prompting traders to buy, while a falling Sensex could signal a bearish market, leading traders to sell.
Moreover, the Sensex provides traders with a benchmark to compare the performance of individual stocks or portfolios. If a stock or a portfolio is consistently outperforming the Sensex, it could indicate a good investment opportunity.
Trading Strategies Based on the Sensex
Traders often develop strategies based on the movements of the Sensex. For instance, momentum traders may buy stocks when the Sensex is rising and sell when it is falling. On the other hand, contrarian traders might buy stocks when the Sensex is falling and sell when it is rising, betting against the prevailing market sentiment.
Furthermore, some traders use technical analysis tools such as moving averages, relative strength index (RSI), and Bollinger Bands in conjunction with the Sensex to identify potential trading opportunities.
Impact of Global Events on the Sensex
Global events can significantly impact the Sensex. For instance, geopolitical tensions, economic crises, changes in monetary policy, and other international events can influence investor sentiment and cause fluctuations in the Sensex.
Traders need to keep a close eye on such events and understand their potential impact on the Sensex. This can help them make informed trading decisions and manage their risk effectively.
Conclusion
The BSE Sensex is a vital tool for traders, investors, and market analysts. It provides a snapshot of the Indian economy's health and the broader Asian market. Understanding the Sensex, its calculation, and its impact on trading can help market participants make informed investment and trading decisions.
Whether you are a seasoned trader or a novice investor, keeping a close eye on the Sensex can provide valuable insights into market trends and potential investment opportunities. Remember, the more informed you are, the better your chances of success in the trading world.
Start Trading with TIOmarkets
Now that you understand the significance of the BSE Sensex index and its role in the financial markets, take the next step with TIOmarkets. As a top rated forex broker, we offer you the platform to trade over 300 instruments across 5 markets, including indices like the Sensex. With over 170,000 accounts opened in more than 170 countries, our low-fee structure and comprehensive educational resources are designed to enhance your trading experience. Ready to dive into the world of trading? Create a Trading Account today and join a community of informed traders at TIOmarkets.
Risk disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Never deposit more than you are prepared to lose. Professional client’s losses can exceed their deposit. Please see our risk warning policy and seek independent professional advice if you do not fully understand. This information is not directed or intended for distribution to or use by residents of certain countries/jurisdictions including, but not limited to, USA & OFAC. The Company holds the right to alter the aforementioned list of countries at its own discretion.
Join us on social media
Behind every blog post lies the combined experience of the people working at TIOmarkets. We are a team of dedicated industry professionals and financial markets enthusiasts committed to providing you with trading education and financial markets commentary. Our goal is to help empower you with the knowledge you need to trade in the markets effectively.
Trade responsibly: CFDs are complex instruments and come with a high risk of losing all your invested capital due to leverage.
These products are not suitable for all investors and you should ensure that you understand the risks involved.