S&P BSE SENSEX®
1. What is the S&P BSE SENSEX®?
S&P BSE SENSEX® or Sensitive Index is not only scientifically designed but also based on globally accepted construction and review methodology. First compiled in 1986, S&P BSE SENSEX® is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies. The base year of S&P BSE SENSEX® is 1978-79 and the base value is100. The index is widely reported in both domestic and international markets through print as well as electronic media.
The index was initially calculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1, 2003. The "Free-float Market Capitalization" methodology of index construction is regarded as an industry best practice globally. All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float methodology.
Due to is wide acceptance amongst the investors; S&P BSE SENSEX® is regarded
to be the pulse of the Indian
stock market . As the oldest index in
the country, it provides the time series data over a fairly long period
of time (from 1979 onwards). Small wonder, the S&P BSE SENSEX® has over the
years become one of the most prominent brands in the Country.
2. What are the objectives of S&P BSE SENSEX®?
The S&P BSE SENSEX® is the benchmark index with wide acceptance among individual investors, institutional investors, foreign investors and fund managers. The objectives of the index are:
- To measure Market Movements
Given its long history and its wide acceptance, no other index matches the S&P BSE SENSEX® in reflecting market movements and sentiments. S&P BSE SENSEX® is widely used to describe the mood in the Indian Stock markets.
- Benchmark for Funds Performance
The inclusion of Blue chip companies and the wide and balanced industry representation in the S&P BSE SENSEX® makes it the ideal benchmark for fund managers to compare the performance of their funds.
- For Index Based Derivatives Products
Institutional investors, money managers and small investors all refer to the S&P BSE SENSEX® for their specific purposes The S&P BSE SENSEX® is in effect the proxy for the Indian stock markets. Since S&P BSE SENSEX® comprises of leading companies in all the significant sectors in the economy, we believe that it will be the most liquid contract in the Indian market and will garner a pre-dominant market share.
3. What are the criteria for selection and review of Securities for the S&P BSE SENSEX® ?
Criteria for Selection and Review of S&P BSE SENSEX® Constituents
The Security selection and review policy for S&P BSE SENSEX® is based on the objective of:
Index Review Frequency : The Index Committee meets every quarter to review all the BSE indices including S&P BSE SENSEX®. However, every review meeting need not necessarily result in a change in the index constituents. In case of a revision in the Index constituents, the announcement of the incoming and outgoing Securities is made six weeks in advance of the actual implementation of the replacements in the Index, in accordance with SEBI requirements.
Qualification Criteria :
The general guidelines for selection of constituent Securities in S&P BSE SENSEX® are as follows.
A. Quantitative Criteria :
- Market Capitalization : The Security should figure in the Top 100 companies listed by full market capitalization. The weight of each S&P BSE SENSEX® Security based on free-float should be at least 0.5% of the Index. (Market Capitalization would be averaged for last six months)
- Trading Frequency : The Security should have been traded on each and every trading day for the last one year. Exception can be made for extreme reasons like Security suspension etc.
- Average Daily Trades : The Security should be among the Top 150 companies listed by average number of trades per day for the last one year.
- Average Daily Turnover : The Security should be among the Top 150 companies listed by average value of shares traded per day for the last one year.
- Industry Representation : The only difference between SCM and TCM is that SCM does not have the rights to clear the trades of other members he can only clear his trades, whereas TCM can clear the trades of any other member
- Listed History : The Security should have a listing history of at least one year on BSE.
B. Qualitative Criteria :
- Track Record : In the opinion of the Committee, the company should have an acceptable track record.
4. What is the beta of S&P BSE SENSEX® Securities ?
Beta measures the sensitivity of a Securities Price movement relative to movement in the S&P BSE SENSEX®. Statistically Beta is defined as: Beta = Covariance (S&P BSE SENSEX®, Stock)/ Variance (S&P BSE SENSEX®).
Note : Covariance and variance are calculated from the Daily Returns data of the S&P BSE SENSEX® and S&P BSE SENSEX® Securities.
5. How is S&P BSE SENSEX® computed ?
S&P BSE SENSEX® is calculated using the "Free-float Market Capitalization" methodology. As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of is stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.
F & O Segment
The base period of S&P BSE SENSEX® is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of S&P BSE SENSEX® involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the S&P BSE SENSEX®. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of Securities etc. During market hours, prices of the index Securities, at which latest trades are executed, are used by the trading system to calculate S&P BSE SENSEX® every second and disseminated in real time.
6. With what frequency is S&P BSE SENSEX® calculation done ?
During market hours, prices of the index Securities, at which trades are executed, are automatically used by the trading computer to calculate the S&P BSE SENSEX® every second and continuously updated on all trading workstations connected to the BSE trading computer in real time. A day's opening, high and low prices are also given by the computer. But the closing prices are calculated using spreadsheet to ensure theoretical consistency.
7. Who maintains the index ?
One of the important aspects of maintaining continuity with the past is to update the base year average. The base year value adjustment ensures that replacement of stocks in Index, additional issue of capital and other corporate announcements like bonus etc. do not destroy the historical value of the index. The beauty of maintenance lies in the fact that adjustments for corporate actions in the Index should not per se affect the index values.
The Index Cell of the exchange does the day-to-day maintenance of the index within the broad index policy framework set by the Index Committee. The Index Cell ensures that S&P BSE SENSEX® and all the other BSE indices maintain their benchmark properties by striking a delicate balance between frequent replacements in index and maintaining its historical continuity. The Index Committee of the Exchange comprises of experts on capital markets from all major market segments. They include Academicians, Fund-managers from leading Mutual Funds, Finance-Journalists, Market Participants, Independent Governing Board members, and Exchange administration.