What Is Sensex in the Stock Market?
Nearly all countries that have their own stock market offer an index of some kind to track its overall performance. In the United States, for example, the S&P 500 Index and the Dow Jones Industrial Average are two widely watched indices that investors monitor for indicators of stock market health. The Sensex is a similar index, derived from activity in the Indian stock market.
Bombay Stock Exchange
India is a large economy with multiple stock exchanges. The Bombay Stock Exchange (BSE) is one of the largest. To track the overall performance, the Bombay Exchange Sensitive Index, commonly abbreviated as “Sensex,” was created. The index is calculated from the prices of 30 major companies listed on the BSE. This is similar to the Dow Jones Industrial Average (DJIA), which also tracks 30 stocks in the American stock market.
The Sensex uses a “free-float capitalization” formula to determine the index’s value. This is similar to a formula based on market capitalization, and gives greater weight to companies with a higher quantity of outstanding shares. Free-float shares are the outstanding shares that actually trade on the exchange. The Sensex calculation significantly differs from the DJIA, which is simply price-weighted. A large company with a substantially greater number of outstanding shares does not factor any more heavily into the DJIA formula than a smaller company with fewer shares. By contrast, the Sensex combines a company’s share price with its market share to calculate its impact on the overall index.
Versus the “Nifty”
The Sensex is not the only index for the Indian stock market. The S&P CNX “Nifty” is another well-known index. While the Sensex tracks only stocks on the BSE, the Nifty tracks stocks on India’s National Stock Exchange (NSE). The Nifty covers more than half of all stock market activity in India, making it more relevant than the Sensex for most investors. Unlike the Sensex, the Nifty was created by an American company, Standard & Poor’s.
In April 1992, a securities scandal led to a decline of nearly 13 percent in the Sensex, the largest percentage drop in its history. On May 18, 2006, the Sensex experienced its largest point drop in its history up until that time, when it fell 826 points. Four days later, the Sensex endured an intraday drop of 1,111 points before recovering much of that loss by day’s end. And during the American credit crisis in 2008, the Sensex lost nearly half its value in only three weeks. However, it rebounded dramatically, rising from just over 8,000 at the low in March 2009 to nearly 18,000 at the end of the year.
The Sensex is India’s oldest stock market index. It began tracking stocks in 1979 but was not formally established until April 1984. The arbitrary value of “100″ was used to begin the index at that time, after which the value changed according to the value-weighted free-floating calculations of the index’s 30 stocks. As of July 9, 2010, the Sensex was valued at nearly 18,000.