If you follow the stock market news or visited any of the finance websites, you would remember reading Sensex. You might remember watching BSE Sensex alongside numbers flashing and people discussing the market movements and influence. A common phrase among your investor friends about how Sensex closed a few hundred points above yesterday and whatnot.
What is Sensex?
Like many other stock exchange indexes across different markets, Bombay Stock Exchange (BSE) created Sensex for its listed companies.. Sensex (or Stock Exchange Sensitive Index) was introduced back in 1986 to measure the market trends for hundred listed companies. But this was later amended to track the only top thirty listed companies on BSE to form the index
The next obvious question you would have is what are these stock exchange indices? Why they matter in the first place.
How does the Sensex index work?
The stock exchange indexes are usually built as a collection of certain companies listed on a stock exchange. These companies are selected based on different criteria like industry, market capital, trading volumes etc. The share value of these selected companies is therefore used to define and calculate the index values like that for Sensex.
In the case of BSE Sensex, the committee chose to pick the top 30 actively traded listed companies on the exchange. And over the period, as the companies evolve and change, the listed companies on Sensex also changed. And the index value is then adjusted and the scaling factor for the index is also updated.
Why is the Sensex index important?
More often than not, there are hundreds of companies listed on the stock exchange and everyday the trading trends for each vary. While each company’s trading is a reflection of its performance, the index helps aggregate this as market performance.
The Sensex index tracks the performance of the top 30 companies, which can be a proxy to understand market trends. The change and fluctuation in the value of the index are used by financial analysts to understand market movements. These indexes and other financial metrics are used as performance measures and as a benchmark for various industries.
This information is not only used by investors and institutional brokers to create trading strategies. Often banks and government agencies use these metrics to assess the economic situation for the market and the country to formulate policies.
Trading index tracking mutual funds
Yes, the idea may seem unbelievable, but there are mutual funds that track the Sensex Index. These mutual funds are composed of the exact same companies and their equity in similar proportions to replicate the index. Therefore, by investing in these funds through your demat account, you can simply follow Sensex and make investment decisions. These funds usually have marginally lower return, but also lower risk as they are designed to track the index. However, we as investors must check the facts before investing in any assets.
Just like Sensex, we have many domestic and international indices like Nifty, S&P 500 etc. built on the same idea. S&P 500 for instance tracks the Fortune 500 companies of the world. All these indices are designed for specific industries, company sizes, regions etc. And so, the financial analysts and traders can model them in different ways.