Stock Market Indices & its fluctuation

Stock Market Indices
& its fluctuation

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.
In stock exchanges, continuous trading in securities takes place and the
trade occurs at different prices.
The short term and the long term fluctuations in prices of securities
are indicators of the variations in the economic variables.

STOCK MARKET INDEX
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.
Stock market indices are useful in understanding the level of prices and
the trend of price movements of the market.
A stock market index acts the indicator of the performance of the
economy or a sector of the economy.

STOCK MARKET INDICES:USEFULNESS
BSE SENSEX & NSE-NIFTY are two major market indices in India.
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.

Sensex/Nifty is calculated using the “Free-float Market Capitalization”
methodology. As per this methodology, the level of index at any point
of time reflects the Free-float market value of 30/50 component stocks
relative to a base period.
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.

Example:
Suppose BSE index (SENSEX) consists of only 2 stocks such as 'X' and 'Y'
Stock Issued Stocks Market Price Market
Cap
X 10000 100 1000000
Y 5000 50 250000
Calculation of Market Capitalization
Stock Open Market
Stocks
Market Price Market
Cap
X 5000 100 500000
Y 2000 50 100000
Calculation of Free Float Market
Capitalization
Company 'X' has 1000 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 5000 are free float shares (open
market shares). Market price of share is Rs.50.
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 vale in 1978-79 / Market cap
value in 1978-79

The same method is used to calulate 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
NIFTY =
(sum of free float market cap of 50 major stocks of NSE) X
Index vale in 1995 / Market cap value in 1995.

Stock Market Indices & its fluctuation

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