Indices

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 atApril 3rd 2000

No.of sharesin 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 PriceSum 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

=120MCAP 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