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INDICES
STOCK MARKET INDEX
• Subset of stocks to measure the stock market.
– Many are cited by the news or financial service
firms 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 WEIGHTED
INDEX
• 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 WEIGHTED
INDEX
SL.No Stock Name
Stock price
as at
April 3rd
2000
No.of shares
in million
Stock price
as at
JULY 2nd
2012
1 ABC 150 20 800
2 DLF 300 12 450
3 GITANJALI 450 16 420
4 JK PAPER 70 30 500
5 MUNDRA 270 8 820
MARKET CAPITALIZATION WEIGHTED
INDEX
• Market capitalization = No. of Shares * Market Price
Sum of the market capitalization of all constituent
stocks 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 constituent
stocks 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 market
cap weight = (49680*1000/18060)
= 2750
• If the exchange decides to replace an existing
constituent with another stock then the sum
of market value of constituent stocks get
changed.
• So they adjust the base price to nullify that
effect.
MARKET CAPITALIZATION WEIGHTED
INDEX
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 holding
is to be submitted by the company to the
Exchange.
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 in
the open market
FREE FLOAT MARKET CAPITALIZATION
• Free Float Factor =
No of shares available for
trading in the open market
total no of outstanding
shares of the company
FREE FLOAT MARKET CAPITALIZATION
Index calculation for Sensex
• Calculation is practiced since 1986
• From 1986 till 2003 it was calculated by the
MARKET CAPITALIZATION WEIGHTED INDEX .
• Now free float Capitalization is practiced by
taking major 30 BSE listed companies.
• Base value(1978-1979) was 100
• Sensex is calculated every 15 seconds.
Index calculation for Sensex
Index calculation for Sensex
Index calculation for Sensex
• Assuming MCAP during 1978-79 is 500,000
• Free float of X+Y = 600,000
Free float Capitalization Index
= 600000* 100/ 500000
=120
MCAP 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 & 24
sectors.
PRICE WEIGHTED INDEX
• A price-weighted index is an index in which
the member companies are weighted in
proportion to their price per share,
– Example: The Dow Jones Industrial Average (DJIA)
• Calculated by sum of the last traded price of
the total no of shares divided by the no of
stocks.
• 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 greater
weight in the index, regardless of the issuing
company's actual size or the number of shares
outstanding
PRICE WEIGHTED INDEX
• The DJIA is probably the best-known and most
widely followed index in the world.
• At its inception, the DJIA started with just 12
stocks and was priced at 40.94.
• The Dow now consists of just 30 stocks, making it
one of the least diversified indices around.
• It is derived by summing up the prices of all 30
member 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 of
technology-related companies listed on
US stock exchanges.
• To provide a benchmark for measuring the
performance of companies using technology
innovation across a broad spectrum of
industries
INDICES CLASSIFICATION
• World or global market indices
– Companies with no regard of domestic domiciled
or traded
– e.g.- MSCI, S & P Global 100
• National Index
– Performance of stock market of given nation

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Indices

  • 2. STOCK MARKET INDEX • Subset of stocks to measure the stock market. – Many are cited by the news or financial service firms which are known as benchmark. • Example – the American S&P 500, – the Japanese Nikkei 225, – the Brazilian Ibovespa, – the Russian RTSI, – the Indian SENSEX
  • 3. TYPES OF INDICES • There are four different types of stock indexes. – Market capitalization weighted index – Free- float market capitalization weighted index – Price weighted index
  • 4. MARKET CAPITALIZATION WEIGHTED INDEX • 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 )
  • 5. MARKET CAPITALIZATION WEIGHTED INDEX SL.No Stock Name Stock price as at April 3rd 2000 No.of shares in million Stock price as at JULY 2nd 2012 1 ABC 150 20 800 2 DLF 300 12 450 3 GITANJALI 450 16 420 4 JK PAPER 70 30 500 5 MUNDRA 270 8 820
  • 6. MARKET CAPITALIZATION WEIGHTED INDEX • Market capitalization = No. of Shares * Market Price Sum of the market capitalization of all constituent stocks 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 constituent stocks as at January 2nd 2012 = (800*20 + 450*12 + 420*16 + 500*30 + 820 *8) = Rs 49,680 million
  • 7. • Therefore the value of the index as per market cap weight = (49680*1000/18060) = 2750 • If the exchange decides to replace an existing constituent with another stock then the sum of market value of constituent stocks get changed. • So they adjust the base price to nullify that effect. MARKET CAPITALIZATION WEIGHTED INDEX
  • 8. 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
  • 9. FREE FLOAT MARKET CAPITALIZATION • Periodic information about the share holding is to be submitted by the company to the Exchange.
  • 10. 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
  • 11. 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
  • 12. FREE FLOAT MARKET CAPITALIZATION • Free float factor = No. of shares available in the open market
  • 13. FREE FLOAT MARKET CAPITALIZATION • Free Float Factor = No of shares available for trading in the open market total no of outstanding shares of the company
  • 14. FREE FLOAT MARKET CAPITALIZATION
  • 15. Index calculation for Sensex • Calculation is practiced since 1986 • From 1986 till 2003 it was calculated by the MARKET CAPITALIZATION WEIGHTED INDEX . • Now free float Capitalization is practiced by taking major 30 BSE listed companies. • Base value(1978-1979) was 100 • Sensex is calculated every 15 seconds.
  • 18. Index calculation for Sensex • Assuming MCAP during 1978-79 is 500,000 • Free float of X+Y = 600,000 Free float Capitalization Index = 600000* 100/ 500000 =120 MCAP weighted index = 1,250,000 *100/500000 = 250
  • 19. Index calculation for Nifty • Base year is 1995 • Base value is 1000 • Represents stock of 50 major companies & 24 sectors.
  • 20. PRICE WEIGHTED INDEX • A price-weighted index is an index in which the member companies are weighted in proportion to their price per share, – Example: The Dow Jones Industrial Average (DJIA) • Calculated by sum of the last traded price of the total no of shares divided by the no of stocks. • Stocks with higher price have more weights.
  • 21. PRICE WEIGHTED INDEX • Thus, in our example, the XYZ index is: $5 + $7 + $10 + $20 + $1 = $43 / 5 = 8.6
  • 22. PRICE WEIGHTED INDEX • Stocks with higher prices receive a greater weight in the index, regardless of the issuing company's actual size or the number of shares outstanding
  • 23. PRICE WEIGHTED INDEX • The DJIA is probably the best-known and most widely followed index in the world. • At its inception, the DJIA started with just 12 stocks and was priced at 40.94. • The Dow now consists of just 30 stocks, making it one of the least diversified indices around. • It is derived by summing up the prices of all 30 member stocks and then dividing that figure by a “magic number”. • CURRENT DIVISOR: 0.12482483
  • 24. NYSE ARCA TECH 100 INDEX • Price weighted index. • Composed of common stocks and ADRs of technology-related companies listed on US stock exchanges. • To provide a benchmark for measuring the performance of companies using technology innovation across a broad spectrum of industries
  • 25. INDICES CLASSIFICATION • World or global market indices – Companies with no regard of domestic domiciled or traded – e.g.- MSCI, S & P Global 100 • National Index – Performance of stock market of given nation