STOCK MARKET INDEX• Subset of stocks to measure the stock market.– Many are cited by the news or financial servicefirms which are known as benchmark.• Example– the American S&P 500,– the Japanese Nikkei 225,– the Brazilian Ibovespa,– the Russian RTSI,– the Indian SENSEX
TYPES OF INDICES• There are four different types of stock indexes.– Market capitalization weighted index– Free- float market capitalization weighted index– Price weighted index
MARKET CAPITALIZATION WEIGHTEDINDEX• Weights given based on the market capitalization– Higher MCap higher weight in the index.• For understanding,– Lets take an example of five constituents in an index– Base value is 1000 (index value at certain date )
MARKET CAPITALIZATION WEIGHTEDINDEX• Market capitalization = No. of Shares * Market PriceSum of the market capitalization of all constituentstocks as at April 3rd 2000=(150*20 + 300*12 + 450*16 + 70*30 + 270 *8)= Rs 18,060 million.• Sum of the market capitalization of all constituentstocks as at January 2nd 2012= (800*20 + 450*12 + 420*16 + 500*30 + 820 *8)= Rs 49,680 million
• Therefore the value of the index as per marketcap weight = (49680*1000/18060)= 2750• If the exchange decides to replace an existingconstituent with another stock then the sumof market value of constituent stocks getchanged.• So they adjust the base price to nullify thateffect.MARKET CAPITALIZATION WEIGHTEDINDEX
FREE FLOAT MARKET CAPITALIZATION• Free float share concept– No of shares available in the market for trading.– Excludes shares held by• Government• Directors/founders• Promoters• Holding through FDI route• Equity held by employee welfare trust
FREE FLOAT MARKET CAPITALIZATION• Periodic information about the share holdingis to be submitted by the company to theExchange.
FREE FLOAT MARKET CAPITALIZATION• Example , company XYZ– Total share = 10000– Held by directors = 2000– Held by government = 5000– Available in the open market = 3000– Market price per share = Rs 100
FREE FLOAT MARKET CAPITALIZATION• Total MCAP =10000 X Rs 100 = Rs 10,00,000• Free float MCAP = 3000 X Rs 100 = Rs 3,00,000
FREE FLOAT MARKET CAPITALIZATION• Free float factor = No. of shares available inthe open market
FREE FLOAT MARKET CAPITALIZATION• Free Float Factor =No of shares available fortrading in the open markettotal no of outstandingshares of the company
Index calculation for Sensex• Calculation is practiced since 1986• From 1986 till 2003 it was calculated by theMARKET CAPITALIZATION WEIGHTED INDEX .• Now free float Capitalization is practiced bytaking major 30 BSE listed companies.• Base value(1978-1979) was 100• Sensex is calculated every 15 seconds.
Index calculation for Sensex• Assuming MCAP during 1978-79 is 500,000• Free float of X+Y = 600,000Free float Capitalization Index= 600000* 100/ 500000=120MCAP weighted index= 1,250,000 *100/500000= 250
Index calculation for Nifty• Base year is 1995• Base value is 1000• Represents stock of 50 major companies & 24sectors.
PRICE WEIGHTED INDEX• A price-weighted index is an index in whichthe member companies are weighted inproportion to their price per share,– Example: The Dow Jones Industrial Average (DJIA)• Calculated by sum of the last traded price ofthe total no of shares divided by the no ofstocks.• Stocks with higher price have more weights.
PRICE WEIGHTED INDEX• Thus, in our example, the XYZ index is: $5 + $7 +$10 + $20 + $1= $43 / 5= 8.6
PRICE WEIGHTED INDEX• Stocks with higher prices receive a greaterweight in the index, regardless of the issuingcompanys actual size or the number of sharesoutstanding
PRICE WEIGHTED INDEX• The DJIA is probably the best-known and mostwidely followed index in the world.• At its inception, the DJIA started with just 12stocks and was priced at 40.94.• The Dow now consists of just 30 stocks, making itone of the least diversified indices around.• It is derived by summing up the prices of all 30member stocks and then dividing that figure by a“magic number”.• CURRENT DIVISOR: 0.12482483
NYSE ARCA TECH 100 INDEX• Price weighted index.• Composed of common stocks and ADRs oftechnology-related companies listed onUS stock exchanges.• To provide a benchmark for measuring theperformance of companies using technologyinnovation across a broad spectrum ofindustries
INDICES CLASSIFICATION• World or global market indices– Companies with no regard of domestic domiciledor traded– e.g.- MSCI, S & P Global 100• National Index– Performance of stock market of given nation