Security Analysis and Portfolio Management - Unit II

1. STOCK MARKET INDICES
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2. INTRODUCTION:
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.

3. 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.

4. 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 INDEX

5. 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

6. 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.

7. 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

8. 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.

9. 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 capitalization of the company is 10,000 X Rs100
=Rs 10,00,000 and
Free float market capitalization of the company is 3000 X Rs100
=Rs 300,000

10. 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 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

11. 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 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
Calculation of Market Capitalization
Calculation of Free Float market
capitalization
Here;
Sum of free float market cap of company X and
company Y is 500000+100000 = 600000
Assume 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.

12. 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 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

13. 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.

14. 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).

15. 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, Ran
baxy, TISCO, TELCO and Satyam.

16. BSE INDICES
 BSE 100
 BSE 200
 BSE IPO
 BSE Mid Cap and BSE Small Cap

17. 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.

18. 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.
National Stock Exchange Indices

19. 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.

20. THE TREND IS YOUR
FRIEND
THANK YOU……