Answer Posted / jyothsna

Everyone has heard of the Sensex. Most of us know it is the
index of the Bombay Stock Exchange. But there are lots of
facts you are probably unware of. Here are six interesting
facts about the Sensex.

1. The Sensex is an abbreviated version of The Bombay Stock
Exchange Sensitive Index.
It is the benchmark index for the Indian stock market,
closely followed by Nifty, which is the index of the
National Stock Exchange. Officially called S&P CNX Nifty,
this name is credited to the 50 stocks that comprise its index.

2. The Sensex is made up of only 30 stocks.
These stocks represent around a dozen sectors. They are
leaders in their respective industries.

3. The stocks are picked by the stock selection committee
(known as the Index Committee).
There are certain basic parameters fixed when picking these
30 stocks. They are:

~ The stock should have been traded on each and every
trading day (the days on which the stock market works) for
the past one year.

~ It should be among the top 150 companies listed by average
number of trades (buying or selling of shares) and the
average value of the trades (in actual rupee terms) per day
over the past one year.

~ The stock should have been listed on the BSE for at least
one year.

4. The job of the Sensex is to capture the price movement of
the equity market.
The Sensex reflects the price movements of shares. If the
Sensex rises, it indicates the market is doing well.

The price of every stock price rises or falls for two
possible reasons:

News about the company, Great earnings, great annual or
quarterly results, product launch, closure of a factory, the
government providing tax or duty exemptions to the sector so
more profits expected, a feud among the company's top
bosses, etc. This will be stock specific news.

News about the country Testing a nuclear bomb, a terrorist
attack, the Budget announcement, new tax regime, declaration
of war, change of government, good monsoons and hence a good
agricultural crop, etc. This will be called index news.

The job of an index is mainly to capture the news about the
country. This will reflect the movement of the stock market
as a whole. It could also reflect the sentiment of the
market as a whole. If corporate India is largely doing well,
then it will get reflected here.

A good index will only capture news that is common to all
stocks in India. This is what the Sensex does. In order to
present a broad picture, the stocks selected are from
different sectors.

5. The value of each of the stocks in the Sensex is not equal.
The market cap method Each of the 30 stocks in the Sensex
has a weight attached to it. This weight depends on the
market capitalization of the stock.

Market capitalization refers to the number of shares of a
company multiplied by its market value (the price of each
share). For instance, if a company has 10 million shares
whose value is Rs 30 per share on July 1, 2006, it will have
a market cap of Rs 300 million on July 1, 2004.

Let's assume the market cap of the 30 Sensex stocks is Rs
3,00,000 crore. Let us also assume the market cap of ITC
(which is one of the 30 shares that make up the Sensex) is
Rs 20,000 crore, then ITC's weight in the Sensex is 6.66%.


The rise or fall in the price of ITC's shares will impact
the Sensex to that extent.
This is referred to as the full market capitalization
methodology.

Free-float weight age Here, a company's entire lot of shares
are not taken into account (which means we are not looking
at the entire market capitalization) . Only the shares
readily available for trading are considered.

In every company, a certain amount of shares are not
available for trading on the stock exchange. These shares
could be held by the government or the promoters of the
company. Under the free-float weightage method, they are not
taken into account.

How does the stock exchange arrive at this weightage? In
this case, the market cap is multiplied by the free float
factor (which is the proportion of a company's shares that
can be readily bought and sold).

The Sensex uses the free-float weightage method.

The Sensex's free-float market cap at close of business on
December 3, 2005, was Rs 3,66,124 crore.

Unlike the Sensex, the 50 stocks in Nifty -- the index of
the National Stock Exchange -- is based on the market cap
method and not the free-float method.

You can read about the free-float method in detail on the
BSE web site.

6. The clincher
Even though the BSE came into existence in 1875, the Sensex
was formulated and came into existence only in 1986.


" The S&P CNX Nifty, or simply Nifty, is the leading index
for large companies
on the National Stock Exchange of India. It consists of 50
companies
representing 24 sectors of the economy, and representing
approximately 47% of
the traded value of all stocks on the National Stock
Exchange of India. "

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