STOCK MARKET INDICES

INTRODUCTION:

STOCK EXCHANGE

A stock exchange can be defined as a centralizedmarket for buying and selling stocks where the priceis determined through supply-demand mechanism.

According to the Securities Contracts(Regulation)Act,1956,which is the main law governing stockexchanges in India, “stock exchange means any bodyof individuals, whether incorporated or not,constituted for the purpose of assisting, regulating, orcontrolling the business of buying, selling or dealing insecurities.

In stock exchanges , continuous trading in securitiestakes place and the trade occurs at different prices.As a result even on a single day, prices of securitiesmay fluctuate.On any trading day, four prices can be easilyidentified,namely,opening price, closing price, thehighest price of the day and the lowest price of theday. Ordinarily prices move in a cyclical fashion,alternatively showing increasing and decreasingtendencies.The short term and the long term fluctuations inprices of securities are indicators of the variations inthe economic variables.

A stock market index is a method of measuring asection of the stock market. Many indices are cited bynews or financial services firms and are usedas benchmarks, to measure the performanceof portfolios such as mutual funds.

Alternatively, an index may also be considered as aninstrument (after all it can be traded) which derives itsvalue from other instruments or indices. The index maybe weighted to reflect the market capitalization of itscomponents, or may be a simple index which merelyrepresents the net change in the prices of theunderlying instruments. Most publicly quoted stockmarket indices are weighted.

STOCK MARKET INDEX

Stock market indices are useful in understanding thelevel of prices and the trend of price movements of themarket.A stock market index is created by selecting a group ofstocks that are capable of representing the wholemarket or a specified sector or segment of the market.The change in the prices of this basket of securities ismeasured with reference to a base period.There is usually a provision for giving proper weights todifferent stocks on the basis of their importance in theeconomy.A stock market index act as the indicator of theperformance of the economy or a sector of theeconomy.

STOCK MARKET INDICES

STOCK MARKET INDICES:USEFULNESS

Stock market indices are the barometer of the stock market.BSE SENSEX,NSE-50 etc are some of the market indices.

Their usefulness: Indices help to recognize broad trends in the market. The investor can use the indices to allocate the funds

rationally among the stocks. Technical analysts use these indices to predict the future

market. Indices function as a status report on the general

economy.

CRITERIA FOR SELECTING STOCKS TO CALCULATE INDEX

Listing history: The company should have listing history on BSE for at least one year

Track record: The company should have listing history

Market capitalization: Compant should have one among 100 market capitalizations of BSE,

And each company should have more than0.5% of total market capitalization of BSE INDEX

Frequency of trading: Company stocks

should be traded on each and every trading

day for the last one year

Industrial representation:Company

Should be a leader in the industry it

represents

Market CapitalisationMarket capitalization is the total worth of all outstanding (issued)shares of a company. It represents the total worth of a company.

Market capitalization=No of shares outstanding x market price of share

Free Float Market CapitalizationFree float concept is an index construction methodology whichmakes use of free float shares in the market.Free float market capitalization is the total worth of all shares of acompany which are available for trading in the open market. Theseshares are called free float shares and are available for trading byanyone.

Example:Company ‘XYZ Ltd’ issues 10000 shares, out of which 2000 shares held bygovernment, 5000 shares by directors of the company and remaining 3000shares are available in the open market for trading. Market price of share is100 Rs.

Here;Total Shares = 10000Shares Held by Government = 2000Shares Held by Directors = 5000Shares available in the Open Market = 3000Market price of share = Rs 100

Here total market capitalization of the company is 10,000 X Rs100=Rs 10,00,000 andFree float market capitalization of the company is 3000 X Rs100=Rs 300,000

SENSEX = (sum of free float market cap of 30 major

companies of BSE) X Index value in 1978-79 / Market

cap value in 1978-79.

Calculation of SENSEX and NIFTYSensex calculation is practiced since 1986. Initially it had beencalculated using total market capitalization method but themethodology changed to free float market capitalization sincefrom 2003. Hence these days Sensex is calculated using freefloat market capitalization of 30 major BSE listed companiesand by using base value 100 (1978-79). SENSEX is calculatedfor every 15 seconds.

Formula for Sensex

Stock

Issued

Stocks Market price Market Cap.

X 10000 100 1000000

Y 5000 50 250000

Stock

Open Market

Stocks Market price Market Cap.

X 5000 100 500000

Y 2000 50 100000

Example:Suppose BSE index (SENSEX) consist of onlytwo stocks such as ‘X’ and ‘Y’

Company ‘X’ has 10000 outstanding sharesout of which only 5000 are available fortrading in open market. Market price ofshare is Rs.100.

Company ‘Y’ has 5000 outstanding sharesout of which 2000 shares are held bypromoters and remaining 3000 are free floatshares (open market shares). Marketprice of share is Rs.50

Calculation of Market Capitalization

Calculation of Free Float marketcapitalization

Here;Sum of free float market cap of company X andcompany Y is 500000+100000 = 600000Assume market cap during 1978-79 is 500000

Now Apply formula;600000*100/500000 = 120 SENSEX = (sum of free float market cap of 30

major companies of BSE) X Index value in

1978-79 / Market cap value in 1978-79.

NIFTY =

(Sum of free flow market cap of 50 major stocks of NSE) X

Index value in 1995 / market cap value in 1995.

The same method is used to calculate NSE nifty butincludes two major changes.• Base year is 1995 and base value (indexvalue) is 1000• Nifty represents stocks of 50 major companiesof NSE.

Formula for NIFTY

BOMBAY STOCK EXCHANGE BSE

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage of over 133 years of existence.

BSE is the first stock exchange in the country which obtained permanent recognition (in 1956) from the Government of India under the Securities Contracts (Regulation) Act (SCRA) 1956.

Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by providing it with cost and time efficient access to resources.

SENSEX (BSE30)

The BSE SENSEX, also called the BSE 30 or simply the SENSEX,

is a free-float market capitalization-weighted stock market index of 30 well-established

and financially sound companies listed on Bombay Stock Exchange.

The 30 component companies which are some of the largest and most actively traded stocks,

are representative of various industrial sectors of the Indian economy. Published since January 1,

1986, the SENSEX is regarded as the pulse of the domestic stock markets in India.

The base value of the SENSEX is taken as

100 on April 1, 1979,

and its base year as 1978-79.

On 25 July, 2001 BSE launched DOLLEX-30,

a dollar-linked version of SENSEX.

As of 21 April 2011,

the market capitalization of SENSEX was about

29,733 billion (US$538 billion) (42.34% of

market capitalization of BSE), while its

free-float market capitalization was

15,690 billion (US$284 billion).

Presently the following are the constituent

companies:

ACC,Infosys, ICICI Bank, Dr. Reddy’s Lab,SBI, CIPLA, Zee Telefilms, Nestle India,RPL, RIL, HCL Tech., Bajaj Auto, BHEL,Castrol, BSES, Colgate Palmolive,Hindalco, Grasim, Glaxo, Hero Honda,Gujarat Ambuja Cements, HLL, HPCL, ITC,L&T, MTNL, Ranbaxy, TISCO, TELCO andSatyam.

BSE INDICES

BSE 100

BSE 200

BSE IPO

BSE Mid Cap and BSE Small Cap

NATIONAL STOCK EXCHANGE (NSE)

The National Stock Exchange of India (NSE) situated in Mumbai - is the largest and most advanced exchange with 1016 companies listed and 726 trading members.

The NSE is owned by the group of leading financial institutions such as Indian Bank or Life Insurance Corporation of India.

The major stock market indices available at the NationalStock Exchange(NSE) are:S and P CNX Nifty , CNX Nifty Junior , S and P CNX 500 ,CNX Midcap 200 , S and P CNX Defty

S and P CNX NiftyIt is an index calculated with a well diversified sample of fiftystocks representing 23 sectors of the economy.The baseperiod selected for nifty is the close of prices on November3,1995,which marks the completion of one year of operationsof NSE’s capital market segment.The base value of the indexhas been set at 1000.

Nifty is managed by India Index Services andProducts Ltd(IISL),which is a joint venture between NSE andCRISIL.The index is known as S and P index because IISLhas consulting and licensing agreement with Standard andPoor’s(S and P),who are world leaders in index services.

National Stock Exchange Indices

CNX Nifty Junior

It is composed of the next most liquid fifty securities so much so S and P

CNX Nifty and CNX Nifty Junior together account for the hundred most liquid

securities traded at NSE.The two indices are constituted in such a way as to

be disjoint sets,that is,a stock will never appear in both the indices at the

same time.

CNX Midcap 200

It is designed to capture the movement of the mid cap segment or medium-

sized capitalization companies.The medium capitalization segment of the

stock market is being perceived increasingly as an attractive investment

segment with high growth potential.

The regional stock exchanges also bring out stock indices calculated

from stocks listed and traded at those exchanges.Many prominent financial

dailies also bring out their own stock market indices.