Engineer's Finance

Sensex is the word which is commonly heard. I wonder how many really know the meaning or ever tried to find it out. I did not know what was Sensex till I started investing.

Sensex is an index which provides an idea as to how the stocks are performing in the market. If most of stocks are bought on a particular day then the Sensex increases and if most of the stocks are sold then Sensex decreases.

How is Sensex formed? Sensex is formed by considering 30 big companies from various sectors such as IT, Power, Oil, Manufacturing, FMG, Retail, Banking and others. Current list of companies present in BSE Sensex can be found from official BSE website. It is basically a collection of various companies stock value.

For eg. Think that Sensex is formed with 5 companies say Infosys, Wipro, BHEL, ICICI and Hindustan Petroleum on 1 Aug 2008. As of today, Infosys is trading @ 100, Wipro @ 50, BHEL @ 20, ICICI @ 30, HP @ 50. On Aug 1 2008 the value of Sensex is determined as 100.

Trade value is 250 (100 + 50 + 20 +30 +50).

Infosys Percentage = (100/250) * 100 = 40%, Wipro = 20%, BHEL = 8%, ICICI = 12%, HP = 20%. This is to show how the Sensex varies with the change in the stock prices of various companies. Assume that after two weeks, the stock prices of the following companies are as follows. Infosys trading @ 120, Wipro @60, BHEL @ 25, ICICI @ 30, HP @ 30.

Trade value is 265 (120 + 60 + 25 + 30 +30).

The value of Sensex is – when trade value is 250 Sensex is 100, when trade value is 265 Sensex is 106. That means if an investor had invested on Aug 1, 2008 Rs. 100 then the value of his investment after two weeks would be equal to Rs. 106. Depending on the trade value the Sensex keeps fluctuating. The big companies that are chosen plays an important role in the Sensex, from the above example it is clear that Infosys plays a major role, if this stock’s value decreases then the Sensex also will decrease considerably and vice versa.

The base value of the Sensex is 100 on April 1, 1979, and the base year of BSE-SENSEX is 1978-79.

At irregular intervals, the Bombay Stock Exchange (BSE) authorities review and modify its composition to make sure it reflects current market conditions.

As of today the value of Sensex is 15167.82 (Market closure – 08/08/08).