BSE Sensex

The free-float method considers only the shares readily available for trading, excluding those held by promoters or the government. This gives a more accurate picture of market sentiment because it reflects the value of shares actually being traded. Using total market capitalization would inflate the index value, as it includes shares that aren't easily bought or sold. For example, if a company has a high market cap but most shares are held by the promoter, its impact on the Sensex will be lower under the free-float method.

The Sensex comprises 30 companies listed on the Bombay Stock Exchange (BSE), while the Nifty 50 comprises 50 companies listed on the National Stock Exchange (NSE). A common trap is assuming they always move in perfect sync; while they correlate, differences in composition and sector representation can lead to performance divergence. Examiners might present a scenario where one significantly outperforms the other and ask you to identify the FALSE reason why.

The Sensex is rebalanced periodically, typically semi-annually, by the Index Committee of the BSE. This involves reviewing the composition of the 30 companies and replacing those that no longer meet the selection criteria (market capitalization, trading frequency, financial performance, sector representation) with more suitable ones. This ensures the Sensex accurately reflects the current state of the Indian stock market and economy. Without rebalancing, the Sensex would become outdated and less representative.

The Sensex is an index, a benchmark, not a directly investable asset. To replicate its performance, investors can invest in index funds or exchange-traded funds (ETFs) that track the Sensex. These funds hold the same stocks in the same proportions as the index, aiming to mirror its returns. So, instead of buying the Sensex itself, you're buying a fund that mimics its behavior.

SEBI regulates the BSE Sensex under the SEBI Act, 1992, ensuring fair practices, investor protection, and market integrity. SEBI monitors trading activity to detect and prevent market manipulation, insider trading, and other fraudulent activities that could artificially inflate or deflate the Sensex. It also sets guidelines for index providers to ensure transparency and accountability in index calculation and maintenance. Recent regulations in 2025 have further strengthened these measures.

Global events like changes in US interest rates, international trade tensions (e.g., US-China trade war), and geopolitical risks (e.g., war in Ukraine) can significantly impact the Sensex. These events affect investor sentiment and capital flows. For example, a rise in US interest rates might lead to foreign investors pulling money out of Indian markets, causing the Sensex to fall. Similarly, trade tensions can disrupt global supply chains and impact the earnings of Indian companies, leading to market volatility.

A common trap is confusing the year the Sensex was *first compiled* (1986) with its *base year* (April 1, 1979). Examiners often present 1986 as the base year. The correct answer is that the base year is April 1, 1979, with a base value of 100.

While the Sensex reflects investor sentiment, it has limitations. It only includes 30 companies, which may not fully represent the diverse sectors of the Indian economy, especially the unorganized sector and SMEs. Also, it's heavily influenced by global factors and the performance of large-cap stocks, potentially masking the struggles of smaller companies or specific sectors. Therefore, it should be used in conjunction with other economic indicators like GDP growth, inflation, and employment data for a comprehensive assessment.

Critics argue that the Sensex primarily reflects the performance of a small number of large, publicly traded companies and doesn't accurately represent the economic realities faced by the majority of the population, particularly those in rural areas or the informal sector. It can be disconnected from ground-level economic conditions. In response, while acknowledging this limitation, I would emphasize that the Sensex *is* a valuable indicator of investor confidence and overall market sentiment, which can indirectly influence broader economic activity. However, policymakers should not solely rely on the Sensex and must consider a wider range of socio-economic indicators to formulate inclusive policies.

Several reforms could strengthen the Sensex: answerPoints: * Increase the number of constituents: Expanding the index beyond 30 companies to include a broader range of sectors and market capitalization sizes would improve its representativeness. * Enhance sector representation: Ensuring that the Sensex adequately reflects the contribution of key sectors like agriculture, MSMEs, and services would provide a more balanced view of the economy. * Improve transparency and governance: Strengthening the independence and accountability of the Index Committee and enhancing transparency in the selection and rebalancing process would increase investor confidence. * Promote financial literacy: Educating investors about the limitations of the Sensex and encouraging them to consider other economic indicators would prevent over-reliance on a single metric.

The decline due to the IT stock sell-off highlights the Sensex's vulnerability to sector-specific shocks. Since IT companies have a significant weightage in the index, negative news or trends affecting the IT sector can disproportionately impact the Sensex's overall performance. This event, driven by concerns about AI disruption, suggests that investors are cautious about the future prospects of certain sectors and are re-evaluating their investments in light of technological advancements and global economic uncertainties. It signals a need for diversification and careful monitoring of sector-specific risks.

While the Sensex is designed to reflect broader market trends, significant news impacting a constituent company can influence its performance. If a company with a high weightage in the Sensex experiences a sharp decline due to fraud or other negative news, it can drag down the overall index. This is because the Sensex is market-capitalization weighted, meaning that larger companies have a greater impact on the index's movements. Therefore, even though the Sensex represents a basket of stocks, individual stock-specific events can have a noticeable effect.