Sensex companies are selected very judiciously by experts. All companies are not included in Sensex. As on date, Sensex has only 31 companies (earlier there were only 30*).
These 31 companies represent complete Indian stock market.
The weightage each company that it has on Sensex, is an essential information for investors.
Company having highest weightage in Sensex often become the most loved company of the market.
The process of inclusion of 31 heavyweight stocks in SENSEX is very clearly laid out by BSE. All heavyweight stocks representing SENSEX are their sector’s representative’s.
The stocks that gets included in SENSEX are fundamentally strong, well established, sector leaders.
These selected companies are reviewed regularly.
Idea is to include those stocks/scripts whose performance can represent overall performance of their respective sectors.
After August 2003, Index (S&P BSE SENSEX) calculation methodology was changed to free float methodology.
Due to this change in Index calculation methodology, index weightage of many stocks saw dramatic change.
What is the difference between full market capitalization and free float capitalization method?
Their main difference is in the ‘numbers of stocks’ that is considered for calculation of index.
In full market capitalization method, stocks held by even promoters, government etc were included.
But in free float method only those stocks which are available for public trading are used for index calculation.
So, those companies which had large promoters holdings lost considerably in weightage.
Only those stocks were included which was readily available for trading in the stock market. Stocks which were not included are as follows:
- Promoters held stocks
- Any one holding stocks who has interest to control company.
- Government of India held stocks
- Stocks held by agency through Foreign Holding Route.
- Anyone holding stocks with strategic focus
- Group companies held stocks
- Employee Welfare Trusts held stocks
Sensex is calculated using free-float market cap concept of all-included companies.
There are 30 companies included in Sensex. When we say that Sensex is 18,000, it means free-float market value of these 30 companies is Rs 18,000 crore.
What is the difference between market capitalization and free-float market capitalization?
- Market cap = Market Price x no. of shares issued by company.
- Free-float market cap = Market cap x free float factor.
Another important information we must remember is the Base Year for Sensex calculation is 1978-79.
In year 1978-70 Sensex was assumed to be 100.
It means from year 1979 till 2018, Sensex has appreciated from 100 to 34,700 points.
There is no partiality in selection of Sensex companies. All companies which are listed in Bombay Stock Exchange (BSE) can be included in Sensex.
As on date more than 5,000 companies are listed in Sensex. But there are few screening criteria’s. All 5,000 companies cannot be eligible for inclusion in Sensex. All 5,000 odd companies of BSE are categorized into 4 groups. The grouping are:
- A Group,
- B Group,
- T Group &
- Z Group.
The Z group of companies are those companies which has not complied with BSE regulations. Hence Z group companies cannot form a part of Sensex 30 companies.
IPO cannot be included in Sensex. To be eligible for Sensex, companies must be listed in BSE for minimum 3 months.
Moreover, in all of these 3 months, the companies stock must have traded on every day.
To be included in Sensex, companies must report sales turnover (total income) of last 4 quarters.
Screening 1 (Free Float):
All companies which satisfies the above preconditions, are then listed in order of their “average three month float market capitalization”.
Then the top 75 ranked companies are considered for further screening.
Screening 2 (Total Market Cap):
Again, all 5,000 companies are ranked based on their total market capitalization.
But this total capitalization is considers as average of last 3 months trading.
This way, we get a new list of top 75 stocks.
All companies ranked based on float-market cap and total market cap are included in one list.
So this way we will have more than 75 selected companies.
These companies, of the combines list are then ranked once again based on average 3 month of traded value.
Companies whose cumulated value traded is <98% are excluded from the list.
Balance companies are again ranked based on float-market capitalization.
Companies which had calculated weight of less than 0.5% are again excluded.
Balance stocks are then categorized based on their sector of business.
Based on float market capitalization, these stocks are ranked again.
Finally, the top 31 stocks are included in Sensex.
Why Sensex Stocks are Critical for investors?
New investors can track the performance of these 31 stocks in detail.
There is one big advantage of tracking thirty one (31) stock with high weightage in Sensex.
These 31 stocks are established stocks, which represent fundamentally super strong companies.
Hence one can afford to cut short the analysis of identifying quality stocks. There 31 are quality stocks.
We have a ready list of stocks which even drives the SENSEX can be blindly tracked and bought if available at good price valuations.
Sensex Companies with its Weightage
(Updated on April’2018)
- Reliance Industries- 9.56%
- Tata Consultancy- 9.26%
- HDFC Bank- 8.21%
- ITC- 5.36%
- Housing Development Financ.- 5.01%
- Hindustan Unilever- 4.96%
- Maruti Suzuki- 4.61%
- Infosys- 3.98%
- Oil & Natural Gas- 3.81%
- SBI- 3.74%
- Kotak Mahindra Bank- 3.49%
- Larsen & Toubro- 3.11%
- ICICI Bank- 3.06%
- Coal India- 2.87%
- Bharti Airtel- 2.54%
- AXIS Bank- 3.31%
- NTPC- 2.29%
- Wipro- 2.13%
- Sun Pharma- 2.01%
- Tata Motors- 1.85%
- Tata Motors DV Ltd- 1.85%
- Asian Paints- 1.83%
- IndusInd Bank- 1.83%
- Power Grid- 1.7%
- Mahindra & Mahindra- 1.59%
- Tata Steel Ltd- 1.43%
- Adani- 1.32%
- Bajaj Auto- 1.32%
- Hero MotoCorp- 1.22%
- Yes Bank- 1.21%
- Dr. Reddy’s Labs- 0.58%
Check this link to get more details about the above 31 Sensex Stocks (like Market Cap, Historical Returns, P/E Ratio, Beta) in a tabulated form…
* You might have noticed that the list of companies in SENSEX is now 31 instead of 30.
Yes, this is a recent change brought into effect by BSE since May’2017.
Since 22nd May’17, GAIL has been removed from 30 Sensex companies, and in its place two companies have been added.
Hence the SENSEX composition has increased from 30 to 31.
The new companies are, Kotak Mahindra Bank and Tata Motors (D).
It is good to invest in those stocks which has high weightage in SENSEX.
These stocks can be considered as best blue chip stocks available in the country.
In order to invest in these 31 stocks, another easier option is to invest in index funds. Index funds which tracks BSE SENSEX are available in the market.
These funds invest only in those stocks which are listed as Sensex scripts.
One can buy units of such index funds, or even better option is to an ETF of Sensex.
If one does not want to go into the effort of identifying quality stocks, investing in index funds/ETF’s can be a good alternative.
Disclaimer: All blog posts of getmoneyrich.com are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyse all securities before investing in one.