What is the Sensex and how is it calculated

11-DEC-2017 22:45

The Sensex was launched by "Bombay Stock Exchange" (BSE) on January 1, 1986. It is one of India's major stock market indexes. It evaluates the fluctuations in stock prices of 30 companies. These 30 companies are big companies in terms of market value, turnover, profit etc. If the Sensex is rising, then it shows that the stock price of most companies of BSE is increasing and if the Sensex decreases, then it show that the share price of most of BSE companies is decreasing. The base year of the Sensex is 1978-79 and the base index value was set at 100.
How fluctuation of the Sensex is calculated?
Fluctuation in the Sensex is calculated on the basis of fluctuation in the share price of all the 30 listed companies. The value of the Sensex has been calculated on every minute basis.

List of Approved Stock Exchanges in India
Let's understand fluctuation of the Sensex with the help of an example:
Suppose that the Sensex is currently at 20000 points. For convenience, we assume that there are only 2 registered companies in BSE, one of which is named "Delta" and the other is "Gamma".
Assume that the value of one share of “Delta” is Rs. 200 and it has a total outstanding share of 10000 whereas the value of one share of “Gamma” is Rs. 500 and its total outstanding share is 7500.
Both of these companies will have the total market capitalization of the BSE ( 200 x 10000)+(500 x 7500) = Rs. 57.50 lacs.
Now suppose that the next day the share price of the “Delta” company rises to 250 (25% hike), and the price of the “Gamma” company's shares decreases to 450 (10% slump).
Now the total market capitalization of BSE at these new share prices will be: (250 x10000) + (450x 7500)= Rs. 58.75 lacs.
Due to the fluctuations in the prices of the two companies, the market capitalization of BSE rose to the level of 58.75 lacs form the previous level of Rs. 57.50 lacs; which is showing 2.17% increase in the market capitalization of the BSE.
So due to this increase in price the Sensex will reach 20434, which is 2.17% higher than 20000.

In the same way, if the share price of both companies falls, then the total market capitalization of BSE will decline.
This fluctuation in BSE keeps happening every minute. If the investors buy more share from the list of 30 companies then the share prices of the companies rises which is followed by the increment in the BSE capitalisation and if the shares of the 30 companies are sold by many investors then the share price falls and market capitalisation of the BSE decreases which is termed as the abatement in the Sensex.

image source:The Economic Times
What was the initial level of the Sensex?
The base year of the Sensex is 1978-79 and for this time the base index value was set at 100. This means that in 1978 the Sensex was considered at 100 points, which was at 113.28 points in 1979 and today it has crossed the 33000 points due to increase in the market value of Bombay Stock Exchange.

Why Share Price of the company fluctuates?
There is no particular reason responsible for the fluctuations in share prices in a company, but many factors are responsible for the fluctuation, if the price of shares of Reliance Industries increases, then it may be due to:
1. Announcement of investor favourable policy by Reliance which motivates investors to buy more shares of the company.

2. A favourable decision taken by the Central or State Government in the favor of Reliance Industries may increase the demand of the shares of Reliance. The people may think that the share price of the Reliance may go up in the future so the demand of the shares may shoot up.

In summary, it can be said that fluctuation in the Sensex depends on the fluctuation in the value of shares of 30 companies and the value of the shares of the 30 companies depend on the demand and supply of the shares of the company. If the demand of the shares is more than the supply, then price of the share will go up and vice-versa. The Sensex, which was 100 points in 1978, has crossed the 33,000 level today.

List of top 30 companies listed in the BSE Sensex

DISCLAIMER: JPL and its affiliates shall have no liability for any views, thoughts and comments expressed on this article.

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