STOCK MARKET INDEX

Stock market indices are the statistical tools that measure trend of price movements of stocks in the market.

A stock market index is created by selecting a group of stocks that are capable of representing the whole market or a specified sector or segment of the market.

The change in the prices of this basket of securities is measured with reference to a BASE PERIOD.

There is usually a provision of giving proper weights to different stocks on the basis of their importance in the economy.

A stock market index acts as an indicator of the performance of the economy or a sector of the economy.

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.

MAJOR STOCK MARKET INDICES

DOW JONES

NASDAQ

S & P 500

SENSEX

NIFTY

NIKKEI

BOMBAY STOCK EXCHANGE BSEBombay Stock Exchange is the oldest stock

exchange in Asia with a rich heritage of over 140 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 140 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-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. 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 as  100 on April 1, 1979, and its base year as 1978-79.

The market capitalization of SENSEX was about 29,733 billion (US$538billion) (42.34% of market capitalization of BSE), while its free-float market capitalization was    15,690 billion (US$284 billion).

SENSEX COMPANIES AS ON APRIL, 2015

1. Axis Bank2. Bajaj Auto Ltd3. Bharat Heavy Electricals Ltd4. Bharti Airtel Ltd5. Cipla Ltd6. Coal India Ltd7. Dr. Reddy's Laboratories Ltd8. GAIL9. HDFC10. HDFC Bank12. Hindalco13. Hindustan Unilever Limited14. ICICI Bank15. Infosys16. ITC17. Larsen18. Lupin Ltd.

19. M&M20. NTPC Ltd21. Oil and Natural Gas Corporation Ltd22. Reliance Industries Ltd23. Vedanta Limited24. State Bank of India25. Sun Pharmaceutical Industries Ltd26. Tata Consultancy Services Ltd27. Tata Motors Ltd28. Maruti Suzuki29. Tata Steel Ltd30. Wipro Ltd

Market CapitalizationMarket 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 share  Free Float Market CapitalizationFree 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: Company ‘XYZ Ltd’ issues 10000 shares, out of which 2000 shares held by government, 5000 shares by directors of the company and remaining 3000 shares are available in the open market for trading. Market price of share is Rs 100. Here;Total Shares =                                       10000Shares Held by Government =                  2000Shares Held by Directors =                       5000Shares available in the Open Market =       3000Market price of share =                 Rs 100 Here 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 

       Sensex calculation is practiced since 1986.

Initially it had been calculated using total market capitalization method but the methodology changed to free float market capitalization since 2003.

Thus Sensex is calculated using free float market capitalization of 30 major BSE listed companies and by using base value 100 (1978-79). SENSEX is calculated for every 15 seconds. 

 

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.

 

SELECTION OF SCRIPS FOR SENSEXMarket Capitalization :

The scrip should be among the top 100 listed companies in terms of market cap.

Market cap of the scrip should be more than 0.5% of the total market cap of the index.

INDUSTRY REPRESENTATION :

The scrip should be representative of its industry group.

The companies in the index are leaders in their respective industries.

REGULARITY OF TRADING :

The scrip should have been traded on every trading day for the last six months, except for extreme reasons.

NUMBER OF TRADES : The scrip should be among top 150 listed companies

by average number of trades per day for the last six months.

VOLUME OF TRADE :

The scrip should be among the top 150 companies listed by average volume traded per day for the last six months.

StockIssued Stocks Market price Market Cap.

X 10000 100 1000000Y 5000 50 250000

StockOpen Market

Stocks Market price Market Cap.X 5000 100 500000Y 3000 50 150000

Example: Suppose BSE index (SENSEX) consist of only two stocks such as ‘X’ and ‘Y’ Company ‘X’ has 10000 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 3000 are free float shares (open market shares). Market price of share is Rs.50

  

  

Calculation of Market Capitalization

Calculation of Free Float market capitalization

Here;Sum of free float market cap of company X and company Y is 500000+150000 = 650000Assume market cap during 1978-79 is 500000 Now Apply formula;650000*100/500000 = 130 

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.

NATIONAL STOCK EXCHANGE National stock exchange of India ltd, the leading stock stock exchange of India was established in 1992.

Set up by a group of leading Indian financial institutions.

Incorporated in 1992 as a tax paying company and was recognized as a stock exchange in 1993 under Securities Contract(Regulation) Act, 1956.

The first exchange in the country to provide fully automated screen based electronic trading system.

NSE’s flagship index is S & P CNX NIFTY.

NSE has a market capitalization of more than US $ 1.6 TRILLION, making it the world’s 12th

largest stock exchange as of 23rd January, 2015.

NSE offers trading, clearing and settlement services in Equity, Equity Derivatives, Debt and Currency Derivatives segments.

 S and P CNX NiftyIt is an index calculated with a well diversified sample of fifty stocks representing 13 sectors of the economy.

The base period selected for nifty is the close of prices on November 3,1995.

The base value of the index has been set at 1000. Nifty is managed by India Index Services and Products Ltd(IISL),which is a joint venture between NSE and CRISIL.

The index is known as S and P index because IISL has consulting and licensing agreement with Standard and Poor’s(S and P),who are world leaders in index services.

 

NIFTY =(Sum of free flow market cap of 50

major stocks of NSE)  X  Index value in 1995 / market cap value

in 1995.

 

USEFULNESS OF NIFTY : Helps investors and the common man to judge the mood of the stock market and the Indian economy.

Helps in comparing performance of a specific company with market performance.

Shareholders can evaluate management of their company.

Traders and intermediaries can judge the market sentiments.

Nifty is used as the benchmark of mutual funds.

IMPORTANCE OF STOCK EXCHANGE It is an organized securities market which can provide sufficient marketability and price continuity for shares.

It provides a reasonable measure of safety and fair dealing in the buying and selling of securities.

Through the interplay of demand for and supply of securities, stock exchange assists in correct evaluation of securities in terms of their real worth.

With proper evaluation of securities, stock exchange helps in the orderly flow of savings between different types of competitive investments.