INDICES for Stock Exchange
Why index/indices??
• To know the health of the market, to make trading and exchanges easy there are indices for stock exchanges. These indices (an index for a stock exchange ) help in estimating if a market is bullish or bearish.
Starting with indices of BSE and NSE –
• The main Index of BSE is SENSEX while that of NSE is CNX Nifty.
• The other indices at BSE are: BSE 500, BSE 100, BSE 200 ETC.
• NSE also has launched several stock indices including: S&P CNX Nifty, CNX Nifty Junior, CNX 100 etc.
What is S & P and DOW JONES ??
• The most widely used market capitalization indices are products of Standard and Poor ( S & P) and Dow Jones.
• They are created by financial companies conducting research and analysis on stocks and bonds.
S & P INDICES INCLUDE:
• S & P 500:free-float capitalization-weighted index of the prices of 500 large-capitalization common stocks actively traded in the US.
• S & p 400 midcap index.
• S & p 600 small cap index.
Theses indices may vary with stock exchange.
BSE SENSEX
• The S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also-called the BSE 30 or simply the SENSEX, is a free-float market-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.
• The base value of the S&P BSE SENSEX is taken as 100 on 1 April 1979, and its base year as 1978–79. Today it has crossed 27400 mark!!
• The index is calculated based on a free float capitalization method. It means these shares are floated and any one can purchase them. In other words no shares owned by stakeholders are included and is available to public.
• A company's stock currently held by all its shareholders and restricted shares owned by the company’s officers are called outstanding shares. They are excluded.
• Market weighted means that contribution of each company towards market depends on the weight of that company. More the shares and value of share, bigger the company, greater is the contribution.
• The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued.
What is market capitalization??
To find the free-float capitalization of a company, first find its market cap (number of outstanding shares x share price) then multiply its free-float factor. The free-float factor is determined by the percentage of floated shares to outstanding.
Egs: if a company has a float of 10 million shares and outstanding shares of 12 million, the percent of float to outstanding is 83%. A company with an 83% free float falls in the 80-85% free-float factor, or 0.85, which is then multiplied by its market cap (e.g., $120 million (12 million shares x .$10/share) x 0.85 = $102 million free-float capitalization).
Sensex and how its calculated??
METHOD ADOPTED FOR SENSEX CACULATION
The method adopted for calculating Sensex is the market capitalisation weighted method in which weights are assigned according to the size of the company. Larger the size, higher the weightage.
The base year of Sensex is 1978-79 and the base index value is set to 100 for that period.
WHY IS THE BASE VALUE SET TO 100 POINTS?
The total value of shares in the market at the time of index construction is assumed to be ’100′ in terms of ‘points’. This is for the purpose of ease of calculation and to logically represent the change in terms of percentage. So, next day, if the market capitalization moves up 10%, the index also moves 10% to 110.
HOW ARE THE STOCKS SELECTED?
The stocks are selected based on a lot of qualitative and quantitative criterias.
HOW IS THE INDEX CONSTRUCTED?
Assume that there is only one stock in the market. In that case, the base value is set to 100 and let’s assume that the stock is currently trading at 200. Tomorrow the price hits 260 (30% increase in price) so, the index will move from 100 to 130 to indicate that 30% growth. Now let’s assume that on day 3, the stock finishes at 208. That’s a 20% fall from 260. So, to indicate that fall, the Sensex will be corrected from 130 to 104(20%fall).
Try to extend the same logic to two stocks – A and B. A is trading at 200 and let’s assume that the second stock ‘B’ is trading at 150. Since the Sensex follows the market capitalization weighted method, we have to find the market capitalization (or size of the company- in terms of price) of the two companies and proportionate weightage will have to be given in the calculation.
CNX NIFTY
• The CNX Nifty, also called the Nifty 50 or simply the Nifty, is National Stock Exchange of India's benchmark stock market index.
• The CNX Nifty covers 22 sectors of the Indian economy and offers investment managers exposure to the Indian market in one portfolio
• The CNX Nifty index is a free float market capitalisation weighted index.
• The index was initially calculated on full market capitalisation methodology. From June 26, 2009, the computation was changed to free float methodology.
• The base value of the index has been set at 1000, and a base capital of Rs 2.06 trillion.[3]
• The CNX Nifty Index was developed by Ajay Shah and Susan Thomas.
