The Slides provide the brief introduction, types, and calculation of Index in Financial Markets

1. Measure of stock market
performance: averages and
Index
Dr. Adeel Nasir

2. Index
• Measure of Change
• Statistical measure of change in Stock market
• E.g.
• Pakistan Stock Exchange
• Bombay Stock Exchange
• NASDAQ
• NYSE stock exchange

3. Important consideration before making an
index
• Which Security to include
• Weights of each security

4. Index Calculation Method
• Change Base Method
• Fixed Base Method

5. Types of Index
• Price Weighted Index
• Market Value Weighted Index
• Equally Weighted Index

6. Price-Weighted Index
• A price-weighted index is a stock index in which each stock influences
the index in proportion to its price per share
• A stock with a higher price will be given more weight than a stock
with a lower price and, therefore, will have a greater say in the index’s
performance

7. Price Weighted Index
Stocks
Market Price Per Share
(MPS) on Jan 1, 2017 MPS on Jan 2, 2017 MPS on Jan 3, 2017
HBL 30 40 35
UBL 25 30 20
ABL 90 100 80
Total price 145 170 135
Average 48.33333333 56.66666667 45
Fixed Base Method
1-Jan 2-Jan 3-Jan
Index (Fixed Base
Method 1000 1172.413793 931.0344828
Index (Change Base
Method) 1172.413793 794.1176471

8. Market Value Weighted Index
• A capitalization-weighted index is a type of market index with
individual components, or securities, weighted according to their
total market capitalization
Market Capitalization= 𝑁𝑜. 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 ∗ 𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒
• The components with a higher market cap carry a higher weighting
percentage in the index. Conversely, the components with smaller
market caps have lower weightings in the index
• Examples are
• Standard and Poor's (S&P) 500 Index, the Wilshire 5000 Total Market Index
(TMWX) and the Nasdaq Composite Index (IXIC), Pakistan Stock Exchange

9. Price Weighted Index
Stocks
No. of Shares
outstanding
(In
thousands)
Market Price
Per Share
(MPS) on Jan
1, 2017
MPS on Jan
2, 2017
MPS on Jan
3, 2017
Market
Capitalization
on Jan.1
Market
Capitalization
on Jan.2
Market
Capitalization
on Jan.3
PTC 200 30 40 35 6000 8000 7000
ITC 300 25 30 20 7500 9000 6000
ICI 100 90 100 80 9000 10000 8000
Sum 22500 27000 21000
Aver 7500 9000 7000
Fixed Base
Method
1-Jan 2-Jan 3-Jan
Index (Fixed
Base Method 1000 1200 933.3333333
Index
(Change Base
Method) 1200 777.7777778

10. Equally weighted Index
• Equal weight is a type of weighting that gives the same weight, or
importance, to each stock in a portfolio or index fund, and the
smallest companies are given equal weight to the largest companies
in an equal-weight index fund or portfolio
• Small-cap stocks are generally considered to be higher risk, higher
potential return investments compared to large-caps

11. Equally Weighted Index
Stocks Investment
Market Price
Per Share
(MPS) on Jan
1, 2017
No. of Shares
Bought
MPS on Jan 2,
2017
Investment
Value
MPS on Jan 3,
2017
Investme
nt Value
HBL 2000 32 62.5 40 2500 35 2187.5
UBL 2000 25 80 30 2400 20 1600
ABL 2000 80 25 100 2500 90 2250
HBL 2000 40 50 50 2500 40 2000
total
Investment
Value 8000 9900 8037.5
Average
investment
Value 2000 2475 2009.375
1-Jan 2-Jan 3-Jan
Index (Fixed
Base Method 1000 1237.5 1004.6875
Index (Change
Base Method) 1237.5 811.8686869