BSE Sensex (Sensitive Index) is the pulse of the Indian capital market. Often interpreted as Sensex India to connote the Indian share market at the international level, this benchmark index was first compiled in January 1, 1986. It comprises of 30 largest and most actively traded stocks. The base year of BSE Sensex is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100.
Current Indian stock market conditions are reflected in the Sensex India index. The calculation of BSE Sensex involves dividing the free float 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 BSE Sensex. It keeps the Sensex India Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scripts, etc. During market hours, prices of the index scripts, at which latest trades are executed, are used by the trading system to calculate the BSE Sensex on a continuous basis using the free-float methodology. Restricted Indian are excluded; only shares readily available for trading are calculated.
Free float methodology was adopted with effect from September 1, 2003. Initially, ‘full market capitalization’ method was used to calculate the BSE sensex. Free float refers to readily available shares for online trading. A listed company in the BSE, in the process, is assigned a weight for the calculation. The free float index reflects the market trends more rationally besides being useful for performance measurement of companies.
The journey of the BSE Sensex from its nascence till date is noteworthy. During the last two decades, the Sensex India recorded a 10 times plus increase. The long-run rate of return on the BSE Sensex works out to be 18.6% per annum.
The BSE Index Cell, comprising of a committee of capital market expert, fund managers, market participants and members of the BSE Governing Board, does a real-time maintenance of Sensex India.
BSE Sensex = Free-float market cap (total 30 companies) /Divisor (divisor is frozen unless there is an in-out of scripts or a rights issue)