Dissecting Sensex
The term “Sensex” has an aura of mystique hanging around it to a common man . There are investors who would surely go by it to measure their successes or failures in terms of the movement of this not so well understood term. While a big rise in sensex would bring back cheery smiles to many investors, a sharp dip in it causes wide-spread panic and depression. It is essentially an exercise aimed at measuring the sentiments of a stock market and a selection of a few stocks which best represents the broad spectrum of a market in terms of liquidity and size of the volume trade etc. The sensitivity of this pick of stock to any event gets reflected in the movement of the sensex and a true index of the situation.
The Bombay Stock Exchange (BSE) which is one of the oldest stock exchange in the world coined this term which has attained the status of a popular brand. In 1986 the BSE authorities introduced this compiling a portfolio of 30 leading stocks and taking 1978-1979 as the base year with 100 as base value and since then it has become the most reliable yardstick to judge the health of the stock markets in India along with Nifty.
The practice that is followed in making up of the sensex runs on the universally accepted methods. The earlier method which was known as “Market Capitalization Method” was discarded to adopt a new and more scientific “Free-Float Method” in 2003. Market capitalization is nothing but the figure arrived at after multiplication of the number shares issued by a company by the price of the day. But all the shares of a company are not freely tradeable when the promoters' quota of holding or shares which are are under lock-in for certain number of years etc. And the free-float excludes this kind of shares. Thus sensex of a given point of time is arrived at by multiplication of the market capitalization by the free-float factor and dividing it by index divisor which is the only connect to the original base value which get adjusted by a host of factors like bonus issues, stock splits or dividend payouts or any other corporate actions.
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