17 August 2007

"Sensex "As It Is

"Sensex" As It Is

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 unware of. Here are
six interesting facts about the Sensex.

1. The Sensex is an abbreviated version of The Bombay
Stock Exchange
(shown Below) Sensitive Index.

It is the benchmark index for the Indian stock market,
closely followed by Nifty, which is the index of the
National Stock Exchange. Officially called S&P CNX
Nifty, this name is credited to the 50 stocks that
comprise its index.

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

3. 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 traded on each and every
trading day (the days on which the stock market works)
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 (in actual rupee
terms) per day over the past one year.

~ The stock should have been listed on the BSE for at
least one year.

4. 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

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 will be
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
will be called index news.

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

A good index will only capture news that is common to
all stocks in India. This is what the Sensex does. In
order to present a broad picture, the stocks selected
are from different sectors.

5. The value of each of the stocks in the Sensex is
not equal.
The market cap method Each of the 30 stocks in the
Sensex has a weight attached to it. This weight
depends on the market capitalization of the stock.

Market capitalization refers to the number of shares
of a company multiplied by its market value (the price
of each share).
For instance, if a company has 10
million shares whose value is Rs 30 per share on July
1, 2006, it will have a market cap of Rs 300 million
on July 1, 2004.

Let's assume the market cap of the 30 Sensex stocks is
Rs 3,00,000 crore. Let us also assume the market cap
of ITC (which is one of the 30 shares that make up the
Sensex) is Rs 20,000 crore, then ITC's weight in the
Sensex is 6.66%.

The rise or fall in the price of ITC's shares will
impact the Sensex to that extent.
This is referred to as the full market capitalization

Free-float weight age Here, a company's entire lot of
shares are not taken into account (which means we are
not looking at the entire market capitalization) .
Only the shares readily available for trading are

In every company, a certain amount of shares are not
available for trading on the stock exchange. These
shares could be held by the government or the
promoters of the company. Under the free-float
method, they are not taken into account.

How does the stock exchange arrive at this weightage?
In this case, the market cap is multiplied by the
free float factor (which is the proportion of a
company's shares that can be readily bought and sold).

The Sensex uses the free-float weightage method.

The Sensex's free-float market cap at close of
business on December 3, 2005, was Rs 3,66,124 crore.

Unlike the Sensex, the 50 stocks in Nifty -- the index
of the National Stock Exchange -- is based on the
market cap method and not the free-float method.

You can read about the free-float method in detail on
the BSE web site.

6. The clincher
Even though the BSE came into existence in 1875, the
Sensex was formulated and came into existence only in

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