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.
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.
STOCK MARKET INDEXA 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 INDICESStock 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:USEFULNESSStock 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 INDEXListing history: The company should have listing history on BSE for at least one yearTrack record: The company should have listing historyMarket 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 INDEXFrequency of trading: Company stocks should be traded on each and every trading day for the last one yearIndustrial representation:CompanyShould be a leader in the industry itrepresents
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 shareFree 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 100Here 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
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 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 onlytwo stocks such as ‘X’ and ‘Y’Company ‘X’ has 10000 outstanding sharesout of which only 5000 are available for Calculation of Market Capitalizationtrading in open market. Market price ofshare is Rs.100. Issued Stock Stocks Market price Market Cap. Company ‘Y’ has 5000 outstanding shares X 10000 100 1000000out of which 2000 shares are held by Y 5000 50 250000promoters and remaining 3000 are free floatshares (open market shares). Market Calculation of Free Float marketprice of share is Rs.50 capitalization Open MarketHere; Stock Stocks Market price Market Cap.Sum of free float market cap of company X andcompany Y is 500000+100000 = 600000 X 5000 100 500000Assume market cap during 1978-79 is 500000 Y 2000 50 100000Now 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.
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 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 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-establishedand 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 as100 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 about29,733 billion (US$538 billion) (42.34% of market capitalization of BSE), while itsfree-float market capitalization was15,690 billion (US$284 billion).
Presently the following are the constituentcompanies: 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.
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.
National Stock Exchange IndicesThe 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 DeftyS 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.
CNX Nifty JuniorIt is composed of the next most liquid fifty securities so much so S and PCNX Nifty and CNX Nifty Junior together account for the hundred most liquidsecurities traded at NSE.The two indices are constituted in such a way as tobe disjoint sets,that is,a stock will never appear in both the indices at thesame time.CNX Midcap 200It is designed to capture the movement of the mid cap segment or medium-sized capitalization companies.The medium capitalization segment of thestock market is being perceived increasingly as an attractive investmentsegment with high growth potential. The regional stock exchanges also bring out stock indices calculatedfrom stocks listed and traded at those exchanges.Many prominent financialdailies also bring out their own stock market indices.