Learn About Stock Market Indices

STOCK MARKET INDICES

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RIYAS.PK (NO:38)

INTRODUCTION:

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STOCK EXCHANGE

A stock exchange can be defined as a centralized market for buying and selling stocks where the price is determined through supply-demand mechanism.

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

In stock exchanges , continuous trading in securities takes place and the trade occurs at different prices.

As a result even on a single day, prices of securities may fluctuate.

On any trading day, four prices can be easily identified,namely,opening price, closing price, the highest price of the day and the lowest price of the day. Ordinarily prices move in a cyclical fashion, alternatively showing increasing and decreasing tendencies.

The short term and the long term fluctuations in prices of securities are indicators of the variations in the economic variables.

STOCK MARKET INDEX

A stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used as benchmarks, to measure the performance of portfolios such as mutual funds.

Alternatively, an index may also be considered as an instrument (after all it can be traded) which derives its value from other instruments or indices. The index may be weighted to reflect the market capitalization of its components, or may be a simple index which merely represents the net change in the prices of the underlying instruments. Most publicly quoted stock market indices are weighted.

STOCK MARKET INDICES

Stock market indices are useful in understanding the level of prices and the trend of price movements of the market.

A stock market index is created by selecting a group of stocks that are capable of representing the whole market or a specified sector or segment of the market.

The change in the prices of this basket of securities is measured with reference to a base period.

There is usually a provision for giving proper weights to different stocks on the basis of their importance in the economy.

A stock market index act as the indicator of the performance of the economy or a sector of the economy.

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 Capitalisation Market 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 Capitalization Free float concept is an index construction methodology which makes use of free float shares in the market.

Free float market capitalization is the total worth of all shares of a company which are available for trading in the open market.

These shares are called free float shares and are available for trading by anyone.

Example: Company ‘XYZ Ltd’ issues 10000 shares, out of which 2000 shares held by government, 5000 shares by directors of the company and remaining 3000 shares are available in the open market for trading. Market price of share is 100 Rs. Here; Total Shares = 10000 Shares Held by Government = 2000 Shares Held by Directors = 5000 Shares available in the Open Market = 3000 Market price of share = Rs 100 Here total market =Rs 10,00,000 and Free float market =Rs 300,000

capitalization

of the

company is 10,000

X

Rs100

capitalization

of the

company is 3000

X

Rs100

Calculation of SENSEX and NIFTY Sensex calculation is practiced since 1986. Initially it had been calculated using total market capitalization method but the methodology changed to free float market capitalization since from 2003. Hence these days Sensex is calculated using free float market capitalization of 30 major BSE listed companies and by using base value 100 (1978-79). SENSEX is calculated for every 15 seconds.

Formula for Sensex 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.

Example: Suppose BSE index (SENSEX) consist of only two stocks such as ‘X’ and ‘Y’ Company ‘X’ has 10000 outstanding shares out of which only 5000 are available for trading in open market. Market price of share is Rs.100.

Company ‘Y’ has 5000 outstanding shares out of which 2000 shares are held by promoters and remaining 3000 are free float shares (open market shares). Market price of share is Rs.50 Here; Sum of free float market cap of company company Y is 500000+100000 = 600000 Assume market cap during 1978-79 is 500000 Now Apply formula; 600000*100/500000 = 120

X

and

Calculation of Market Capitalization

Stock X Y

Issued Stocks 10000 5000

Calculation of capitalization Stock X Y

Market price 100 50

Free

Open Market Stocks 5000 2000

Market Cap. 1000000 250000

Float

Market price 100 50

market

Market Cap. 500000 100000

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.

The same method is used to calculate NSE nifty but includes two major changes. • Base year is 1995 and base value (index value) is 1000 • Nifty represents stocks of 50 major companies of NSE. Formula for NIFTY NIFTY = (Sum of free flow market cap of 50 major stocks of NSE) X Index value in 1995 / market cap value in 1995.

BOMBAY STOCK EXCHANGE BSE 

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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 and Satyam.

BSE INDICES 

BSE 100

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BSE 200

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BSE IPO

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BSE Mid Cap and BSE Small Cap

NATIONAL STOCK EXCHANGE (NSE) 

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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.

National Stock Exchange Indices The major stock market indices available at the National Stock 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 Nifty It is an index calculated with a well diversified sample of fifty stocks representing 23 sectors of the economy.The base period selected for nifty is the close of prices on November 3,1995,which marks the completion of one year of operations of NSE’s capital market segment.The base value of the index has been set at 1000.

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

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 mediumsized 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.

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