A Study of NSE and BSE in Short

1. A STUDY ON BSE AND NSE
|Dipak Senapati |
IIM-Shillong

2. AGENDA
 Introduction of Stock Exchange
 Functions of Stock Exchange
 Bombay Stock Exchange (BSE)
 SENSEX
 National Stock Exchange
 NIFTY
 Benefits to Investors and Companies
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3. STOCK EXCHANGE
 Definition : The Securities Contracts (Regulation) Act, 1956 defines a
stock exchange as "an association, organization or body of
individuals, whether incorporate or not, established for the purpose
of assisting, regulating and controlling the business in buying, selling
and dealing in securities“
 Meaning : A Stock exchange or securities market is an organized
market where listed securities are purchased & sold for investment
or speculation.
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4. HISTORY OF STOCK EXCHANGE
The stock exchange was established by “East India Company” in 18th
century . In India it was established in 1850 with 22 stock brokers
opposite to town hall Bombay. This stock exchange is known as oldest
stock exchange of Asia.
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5. FUNCTIONS OF STOCK EXCHANGE
 Provide central and convenient meeting places for sellers and
buyer of securities
 Increase the marketability and liquidity of securities
 Contribute to stability of prices of securities
 Equalization of price of securities
 Smoothen price movement
 Help the investors to know the worth of their holdings
 Promote the habit of saving and investment
 Help capital formation
 Help companies and government to raise funds from the investors
 Provide forecasting service
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6. BOMBAY STOCK EXCHANGE (BSE)
 Bombay Stock Exchange is the largest, with over 6,000 stocks listed.
 The BSE accounts for over two thirds of the total trading volume in
the country.
 Established in 1875, the exchange is also the oldest in Asia.
 Among the twenty-three Stock Exchanges recognized by the
Government of India under the Securities Contracts (Regulation)
Act, 1956, it was the first one to be recognized and it is the only one
that had the privilege of getting permanent recognition.
 Scrips at BSE : ACC, Airtel, BHEL, DLF, Grasim, Gujarat Ambuja, HDFC,
HDFC Bank, Hindalco, HUL, ICICI Bank, Infosys, Sun Pharma Ind. Ltd.,
ITC, L&T, Maruti, Mahindra & Mahindra, NTPC, ONGC, Ranbaxy,
Reliance Communications, Reliance Infrastructure, RIL, Sterlite
Industries, SBI, TCS, Tata Motors, Tata Steel, Tata Power Company
Ltd., Wipro
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7. VISION AND MISSION OF BSE
 Vision
Our vision is to be the most sought after learning provider in the world in
areas of financial and leadership learning, by pioneering the generation
and dissemination of knowledge for the enhancement of skills and
capabilities of professionals and aspiring professionals.
 Mission
As a center of learning, our mission is to promote an open learning
environment that brings together people, cultures and ideas from around
the world, changing lives and helping transform organizations through
innovative learning programs.
Through our learning programs, we develop responsible, thoughtful
leaders and entrepreneurs who create value for their organizations
and their communities.
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8. BSE - INDICES
 Stock Market performance is quantified by calculating an index using the
benchmark scrip’s and as known to all SENSEX (Sensitive Index) is
associated with Bombay Stock Exchange
 The SENSEX 30 Stocks are selected on the basis of following factors:
 Listing History
 Trading Frequency
 Rank based on the Market Cap (Should be Among top 100)
 Market Capitalization weight
 Industry / sector they belong
 Historical Record
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9. SENSEX
 SENSEX has been calculated since 1986 and initially it was calculated
based on the Total Market Capitalization methodology and the
methodology was changed in 2003 to Free Float Market Capitalization
 Hence, these days, the SENSEX is based on the Free Floating Market cap of
30 SENSEX Stocks traded on the BSE relative to the base value which is
100(1978-79) and it is calculated for every 15 seconds.
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10. SENSEX CALCULATION METHODOLOGY
 SENSEX is calculated using the "Free-float Market Capitalization"
methodology, wherein, the level of index at any point of time reflects the
free-float market
 It reflects value of 30 component stocks relative to a base period
 The market capitalization of a company is determined by multiplying the
price of its stock by the number of shares issued by the company
 This market capitalization is further multiplied by the free-float factor to
determine the free-float market capitalization
 The formula for calculating the SENSEX = (Sum of free flow market cap of 30
benchmark stocks)*Index Factor
where,
Index Factor = 100/Market Cap Value in 1978-79.
100 is the Index value during 1978-79.
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11. HOW SENSEX IS CALCULATED? -
EXAMPLE
 Assume SENSEX has only 2 stocks namely SBI and RELIANCE. Total shares in
SBI are 500 out of which 200 are held by Government and only 300 are
available for public trading. RELIANCE has 1000 shares out of which 500 are
held by promoters and 500 are available for trading. Assume price of SBI
Stock is Rs.100 and Reliance is Rs.200. Then "free-Floating Market Cap" of
these 2 companies =
(300*100+500*200) = 30000+100000 = Rs. 130000
Assume Market Cap during the year 1978-79 was Rs.25000
Then SENSEX = 130000*100/25000 = 520.
The methodology in the example is exactly followed to calculate the
SENSEX, only difference being the inclusion of 30 stocks.
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12. National Stock Exchange (NSE)
 The National Stock Exchange is India's largest financial market
 Established in 1992, the NSE has developed into a sophisticated, electronic
market, which ranks third in the world for transacted volume.
 It opened for trading in mid-1994
 The NSE conducts transactions in the wholesale debt, equity and derivative
markets
 The National Stock Exchange has been a pioneer for Indian financial
markets, being the first electronic limit order book to trade derivatives
and ETFs
 It was recently accorded recognition as a stock exchange by the
Department of Company Affairs
 The instruments traded are, treasury bills, government security and bonds
issued by public sector companies
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13. OBJECTIVES OF SETTING NSE
 Establishing nationwide trading facilities for all types of securities.
 Ensuring equal access to investors all-over the country through an
appropriate communication network.
 Meeting international benchmarks and standards.
 Enabling shorter settlement cycles and book entry settlements.
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14. NSE - INDICES
 NSE has launched several indices which are as follows:
 S&P CNX Nifty (Standard & Poor's CRISIL NSE Index)
 CNX Nifty Junior
 CNX 100 (= S&P CNX Nifty + CNX Nifty Junior)
 S&P CNX 500 (= CNX 100 + 400 major players across 72 industries)
 CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200)
 CNX stands for CRISIL NSE Indices.
 CNX ensures common branding of indices, to reflect the identities of both the
promoters, i.e. NSE and CRISIL.
 Thus, 'C' stands for CRISIL, 'N' stands for NSE and X stands for Exchange or Index.
 The S&P prefix belongs to the US-based Standard & Poor's Financial Information
Services.
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15. S&P CNX Nifty
 The S&P CNX Nifty, also called the Nifty 50 or simply the Nifty, is a stock market
index and benchmark index for Indian equity market. Nifty is owned and
managed by India Index Services and Products Ltd. (IISL), which is a joint venture
between NSE and CRISIL (Credit Rating and Information Services of India
Ltd). IISL is India's first specialized company focused upon the index as a core
product. IISL has a marketing and licensing agreement with Standard &
Poor's for co-branding equity indices. 'CNX' in its name stands for 'CRISIL NSE
Index'.
 S&P CNX Nifty has shaped up as the largest single financial product in India, with
an ecosystem comprising: exchange traded funds (onshore and offshore),
exchange-traded futures and options (at NSE in India and
at SGX and CME abroad), other index funds and OTC derivatives (mostly
offshore).
 The S&P CNX Nifty covers 22 sectors of the Indian economy and offers
investment managers exposure to the Indian market in one portfolio. The S&P
CNX Nifty stocks represents about 67.27% of the free float market capitalization
of the stocks listed at NSE as on September 30, 2012.
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16. S&P CNX Nifty cont. 16
 The S&P CNX Nifty index is a free float market capitalization weighted
index. The index was initially calculated on full market capitalization
methodology. From June 26, 2009, the computation was changed to
free float methodology. The base period for the S&P CNX Nifty index is
November 3, 1995, which marked the completion of one year of
operations of NSE's Capital Market Segment. The base value of the
index has been set at 1000, and a base capital of Rs 2.06 trillion. The S&P
CNX Nifty Index was developed by Ajay Shah and Susan Thomas.
 Partnership: The S&P CNX Nifty is owned and managed by India Index
Services and Products Ltd. (IISL), which is a joint venture between the
NSE and CRISIL. IISL is India’s first specialized company focused on an
index as a core product. IISL has a licensing and marketing agreement
with Standard & Poor’s, who is a world leader in index services
 The S&P CNX Nifty is a 50 stock, float-adjusted market-capitalization
weighted index for India, accounting for 21 diversified sectors of the
economy. It is used for a variety of purposes, such as benchmarking
fund portfolios, index based derivatives and index funds
 The S&P CNX Nifty is derived from economic research and is created for
those interested in investing and trading in Indian equities

17. S&P CNX Nifty cont. 17
 Currency of Calculation: For the S&P CNX Nifty, all prices are in Indian
rupees.
 Base Date : The base period for the S&P CNX Nifty index is November 3,
1995, which marked the completion of one year of operations of NSE's
Capital Market Segment. The base value of the index has been set at
1000, and a base capital of Rs 2.06 trillion
 Liquidity: Market impact cost is the best measure of the liquidity of a
stock. It accurately reflects the costs faced when actually trading an
index. For a stock to qualify for inclusion in the S&P CNX Nifty, it has to
reliably have market impact cost below 0.50 %, when doing S&P CNX
Nifty trades of Rupees (Rs) 20 million. The current impact cost of the S&P
CNX Nifty for a portfolio size of Rs 20 million is 0.13%.
 Hedging Effectiveness: The basic risk of the S&P CNX Nifty futures is lower
than other index portfolios, due to the liquidity of the S&P CNX Nifty
constituent stocks and of the NSE. In addition, the S&P CNX Nifty has
higher correlations with typical investment portfolios in India, compared
to other indices. These two factors allow for effective hedging of the
Index.

18. S&P CNX Nifty Companies of India
As of 28 Sep 2012:
 ACC
 Ambuja Cements
 Asian Paints
 Axis Bank
 Bajaj Auto
 Bank of Baroda
 BHEL
 BPCL
 Bharti Airtel
 Cairn India
 Cipla
 Coal India
 DLF
 Kotak Mahindra Bank
 L&T
 Lupin
 Mahindra & Mahindra
 Maruti Udyog
 NTPC
 ONGC
 Power Grid
Corporation
 PNB
 Ranbaxy Laboratories
 Reliance Infrastructure
 Dr. Reddy's
Laboratories
 Reliance Industries
 Sesa Goa
 Siemens
 SBI
 Sun Pharmaceutical
 TCS
 Tata Motors
 Tata Power
 Tata Steel
 Ultratech Cement
 Wipro
 GAIL
 Grasim Industries
 HCL Technologies
 HDFC
 HDFC Bank
 Hero MotoCorp
 Hindalco Industries
 HUL
 Infosys
 ICICI Bank
 IDFC
 ITC Limited
 Jaiprakash Associates
 Jindal Steel and
Power

19. CALCULATIONS OF THE S&P CNX DEFTY
 The U.S. dollar/Rupee exchange rate is based on a real-time polled
indicative data feed, which contains bid/ask rates at a point in time.
The polled data is sourced from Thomson Reuters. The data is polled
from market participants, including leading nationalized banks, private
Indian banks and foreign exchange brokers. The frequency of polled
data is more than 3-4 updates per minute, depending on market
volatility, totaling more than 1000 updates in a day. The closing value
of S&P CNX Defty is computed based on a simple average of the U.S.
dollar/Rupee exchange rates received during the last half an hour of
trading on the National Stock Exchange of India Ltd. (NSE) and applied
to the closing value of the S&P CNX Nifty.
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20. INDEX CLOSURE ALGORITHM
 The closing SENSEX & NIFTY on any trading day is computed taking the
weighted average of all the trades on SENSEX & NIFTY constituents in
the last 30 minutes of trading session.
 If a SENSEX & NIFTY constituent has not traded in the last 30 minutes, the
last traded price is taken for computation of the Index closure.
 If a SENSEX & NIFTY constituent has not traded at all in a day, then its last
day's closing price is taken for computation of Index closure.
 The use of Index Closure Algorithm prevents any intentional
manipulation of the closing index value.
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21. BENEFITS OF STOCK EXCHENGES TO
COMMUNITY
 It assist the economies development by providing a body of interested
investors.
 It uploads the position of superior enterprises and assist them in raising
further funds.
 It encourages capital formation
 Government can undertake projects of national importance and social
value raising funds through the sale of its securities on the stock
exchange.
 It is the stock exchanges that central bank of a country can control
credit by undertaking open market operations (purchase and sale of
securities)
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22. BENEFITS OF STOCK EXCHENGES TO
COMMUNITY
 It assist the economies development by providing a body of interested
investors.
 It uploads the position of superior enterprises and assist them in raising
further funds.
 It encourages capital formation
 Government can undertake projects of national importance and social
value raising funds through the sale of its securities on the stock
exchange.
 It is the stock exchanges that central bank of a country can control
credit by undertaking open market operations (purchase and sale of
securities)
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23. BENEFITS TO INVESTOR
 Liquidity of the investment is increased
 The securities dealt on a stock exchange are good collateral security
for loans.
 The stock exchange safeguards interests of investors through strict
enforcement of rules and regulations.
 The present net worth of investments can be easily known by the daily
quotations.
 The risk is considerably less when investor holds or purchases listed
securities.
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24. BENEFITS TO COMPANY
 A company whose shares quoted on stock exchange they enjoy better
reputation and credit.
 The market for the shares of such a company is naturally widened.
 The market price of securities is likely to be higher in relation to its
earnings, dividends and property values. This raises the bargaining
power of the company in the event of a takeover, merger or
amalgamation.
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