WHAT IS SENSEX AND ITS IMPORTANCE IN THE INDIAN STOCK MARKET?-VRK100-17122009

What is Sensex and Its Importance in The Indian Stock Market? - VRK100 - 17122009
 

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Sensex is basically an indicator of the health of the stock markets in India. It is the most popular stock market index in India. It is just a number and the value of Sensex is closely followed by a number of investors, promoters, market experts, brokers and several other stakeholders not only in India but across the world. One can know the relative strength or weakness of the Indian stock market by the movement of Sensex on the Bombay Stock Exchange, popularly known as BSE. Sensex is an acronym for ‘Sensitive Index’ of the BSE, the country’s well-known stock exchange with its existence dating back to 1875. With a history of 134 years, it is Asia’s oldest stock exchange. It started as “The Native Share and Stock Brokers’ Association.” It is situated at Dalal Street in the Fort area of Bombay.

Sensex is an index of equity shares of India’s top 30 companies representing 12 major sectors in India. It was first launched on January 1, 1986. The Sensex started with a base value of 100 in 1978-79. The Sensex is closed at 16,913 points on December 16, 2009; which means the value of Sensex has gone up by about 170 times (16,913 divided by the base value 100) in the last 30 years or so. One year back, the Sensex was at 9,715 points – which means the value of Sensex has gone up by 1.74 times in the last one year.

The composition of Sensex changes dynamically – existing companies are excluded and new companies are added on a regular basis. However, the total number of companies in the Sensex is always kept at thirty. For example, Ranbaxy Laboratories was excluded from Sensex on June 29, 2009 and simultaneously Hero Honda Motors Limited was included on the same date in the Sensex. Other latest inclusions are stocks of Sun Pharma, Sterlite Industries, Tata Power and Jaiprakash Associates; while simultaneously excluding Satyam Computers, Ambuja Cements, Cipla and Bajaj Auto respectively. Moreover, a company may be excluded on a particular date but the same company may be included in Sensex at a later date. For example, Hero Honda Motors, which was excluded from Sensex in July 2007, was again re-included in Sensex in June 2009 due to its stellar profits. The exclusion and inclusion is a dynamic process.

Major Milestones In The History Of Sensex

Jul. 25, 1990 Sensex touched four-digit figure for the first time and closed at 1,001

Jan. 15, 1992 Sensex touched 2,000 points for the first time

Feb. 29, 1992 Sensex touched 3,000 points for the first time

Mar. 30, 1992 Sensex touched 4,000 points for the first time

Oct. 11, 1999 Sensex touched 5,000 points for the first time

Feb. 11, 2000 Sensex touched 6,000 points for the first time

Jun. 21, 2005 Sensex touched 7,000 points for the first time

Feb. 7, 2006 Sensex touched 10,000 for the first time

Jul. 6, 2007 Sensex crossed 15,000-mark for the first time

Oct. 29, 2007 Sensex crossed 20,000 for the first time

Jan. 8, 2008 Sensex touched all-time peak of 21,078 points before closing at 20,873

Oct. 27, 2008 Sensex crashed to 7,697 points intra-day, a massive fall of 63.5 per cent from its Jan.2008-peak of 21,078 points


Often, Sensex is seen, though wrongly, as a leading indicator of India’s economic strength. There are many investors who believe that the rise or fall of Sensex on the BSE is directly related to the strength or weakness of India’s economy. Stock markets, by nature, go up and down in unpredictable ways. Likewise, Sensex also moves in different directions – depending on factors, like, corporate performance, availability of money at cheaper rates, sentiments of the investors’ community, the growth of India’s national income and several other factors – including global factors. The movement of Sensex usually reflects the investors’ perception of the company’s future profits. So, it is not necessary that the rise in Sensex is directly related to the growth of India’s economy. On the other hand, it is not necessary that the fall of Sensex is due to the weakness in the Indian economy. It is not necessary that Sensex is a barometer of India’s economy.

Sensex is expressed in number of points indicating the relative price movements of India’s 30 topmost companies as compared to previous day, year, decade or even a minute. The Sensex changes its value every nano second, in a constant manner, during the market trading hours. The companies that form part of BSE-Sensex are picked up by the management of BSE – based on factors, like, track record of the company, number and frequency of shares traded on the exchange, financial performance and strength of the particular company, market capitalization and industry/sector-wise representation.

Every company will be given a particular weight in the Sensex depending on its market capitalization and free float. Market capitalization is number of paid-up equity shares of a company multiplied by its current market price and it is total market value of the company’s equity shares. Free float is defined as the number of listed equity shares of a particular company that are readily available for trading on the stock exchange. Free float is nothing but number of shares held by investors other than the stake owned and controlled by promoters and their strategic partners with controlling interest, Government shareholding (if any), equity shares held by associate or group companies and equity shares held by Employees’ Welfare Trusts.

For example, the total number of equity shares of Infosys Technologies is 57.33 lakh shares. Its market price at close on December 16, 2009 is Rs 2,544.80. So, the total market capitalization is Rs 1.46 lakh crore (57.33 lakh multiplied by 2544.80). The promoters’ shareholding is 16.5 per cent only in the company. That means, 83.5 per cent of the company’s equity is readily available in the stock exchange for trading at any given point of time and so its free-float is 85 per cent (rounded off for the purpose of easy calculation). And the free-float market cap of Infosys Technologies as on December 16, 2009 is Rs 1.24 lakh crore (Rs 1.46 lakh crore multiplied by 0.85). Let us take another extreme case, ONGC. The full market cap of ONGC is Rs 2.54 lakh crore. The President of India, representing the Government of India, has a share of around 80 per cent in ONGC. This means, its free float is only 20 per cent. And its free-float market cap is Rs 0.51 lakh crore (2.54 lakh crore multiplied by 0.20), giving it a weight of only four per cent in the Sensex. And in the case of ICICI Bank, there are no promoters and as such its free float is 100 per cent of its paid-up capital. So, its full market cap is equal to its free float market cap, that is Rs 0.91 lakh crore, giving it a weight of 7.2 per cent, third highest in the 30-company Sensex.

The total market capitalization of all the companies listed on the BSE is Rs 58.67 lakh crores. And the total market capitalization (or market cap or m.cap) of 30 companies that are part of BSE-Sensex is Rs 25.64 lakh shares. Theoretically, it means that if all the equity shares of these 30 companies are sold on the stock exchange, the shareholders should get an amount of Rs 25.64 lakh crore on that particular day. However, from a practical point of time, it is not possible to get that much amount. The market capitalization of 30 companies on the Sensex based on free float methodology is Rs 12.73 lakh crore. (These figures are as on December 16, 2009).


What are the topmost companies in Sensex?


Top Five Sensex Stocks       Weight % *                           Top Five Sensex Sectors       Weight % #

Reliance Industries                   13.52                                 Finance                                   22.15

Infosys Technologies                 9.74                                 Oil and Gas                             17.51

ICICI Bank                              7.20                                 Information Technology            14.58

Larsen and Toubro                   7.13                                 Capital Goods                          10.28

HDFC Ltd                               5.27                                 FMCG                                       7.46

* Weight of the company in the Sensex as on December 16, 2009

# Weight of the sector in the Sensex as on December 16, 2009 NB: FMCG – Fast-Moving Consumer Goods sector



Total weight of these top five companies in the Sensex is 43 per cent. Which means, any movement in the stock prices of these five companies will have a large impact on the movement of Sensex itself. India’s dominating company is Reliance Industries with a weight of 13.52 per cent in the Sensex. Other leading Sensex companies in addition to those given in the above table are: ITC, HDFC Bank, State Bank of India, ONGC, Bharti Airtel, TCS and BHEL. As far as sectors are concerned, the top five sectors are Finance, Oil & Gas, IT, Capital Goods and FMCG with a massive weight of 72 per cent among themselves in Sensex. The other seven sectors that are part of the Sensex are Metals, Transport Equipment, Power, Telecom, Housing, Diversified and Healthcare.

Is Sensex a barometer of India’s economy?

Sensex is the most popular index in Indian Stock Market. It is followed by millions of stakeholders and general public all over the world. It is synonymous with the strength of financial markets. Its movement is widely tracked because it is easily understandable by all people as it is just a number and investors find it extremely simple to follow. It has attained iconic status in India in the last three decades. It has achieved massive brand value not only in India but all over the globe. As Such, this is just a start-up or a springboard for several investors who are testing the stock markets for the first time in India. It is no wonder it has become an integral part of India’s economy and has become leading economic indicator in India. However, it is not necessary that it is a barometer of India’s growing economy.


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