REPORT

On

INTERNATIONAL INDICES

MASTER OF BUSINESS ADMINISTRATION

Academic Session 2008-2010

SUBMITTED TO SUBMITTED BY
Ms. Shilky (Faculty MIB) Puneet Jain (082)

Delhi Institute of Advance Studies

1 Copyrights© Puneet Jain
2009-2011
 International Indices
“Stock Market is a place where the stocks of a listed company are traded. A single figure that sums
up the overall performance of the market on a daily basis is the Stock Index. A good Stock Index
captures the movement of the well diversified and highly liquid stocks. For a lay man it is the pulse
rate of the economy.Index movements reflect the changing expectations of the stock market about
future dividends of the corporate sector. “

What do you mean by 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 to benchmark the performance of portfolios such as mutual funds.

A national index represents the performance of the stock market of a given

nation—and by proxy, reflects investor sentiment on the state of its
economy. The most regularly quoted market indices are national indices
composed of the stocks of large companies listed on a nation's largest stock
exchanges, such as the British FTSE 100, the French CAC 40, the German
DAX, the Japanese Nikkei 225, the American DJIA and S&P 500, the Indian
Sensex and S&P CNX Nifty , the Australian All Ordinaries and the Hong
Kong Hang Seng Index.

The concept may be extended well beyond an exchange. The Dow Jones
Total Stock Market Index, as its name implies, represents the stocks of
nearly every publicly traded company in the United States, including all U.S.
stocks traded on the New York Stock Exchange (but not ADRs) and most
traded on the NASDAQ and American Stock Exchange.

Weighting of Index or Valuation of Index

Price-weighted index such as the Dow Jones Industrial Average, the price of
each component stock is the only consideration when determining the value
of the index. Thus, price movement of even a single security will heavily
influence the value of the index even though the dollar shift is less
significant in a relatively highly valued issue, and moreover ignoring the
relative size of the company as a whole.

2 Copyrights© Puneet Jain

2009-2011
Market Capitalization Weighted: The equity price is weighted by the
market capitalization of the company. Hence each constituent stock in the
index affects the index value in proportion to the market value of all
outstanding shares.

(Current market capitalization)

Index = ---------------------------------------- x Base Value
(Base Market Capitalization)

Where:
CMS = Sum of (current market price * outstanding shares) of all securities
in the index
BMS = Sum of (market price * issue size) of all securities as on base date.

Equal Weighted: The weights are equal and assigned irrespective of both
market capitalization or price.

Index revision is done periodically taking into consideration the factors

mentioned above. The relevant index body makes clear, researched and
publicly document -ed rules for this purpose. These rules are applied
regularly, to obtain changes to the index set. However, it is ensured that the
value of the index does
not change significantly after the revision of the index set.

Determinants of a Stock Index

Following parameters should be taken into picture before one constructs a
stock index:

Liquidity – Liquidity of stocks as measured by the “impact cost” criterion

which determines the cost faced when actually trading the index. For
example if the current market price of a stock is Rs 200 and a trader
purchases it at Rs 202 (due to involved transaction costs) then the market
impact cost is 1% and the stock is considered highly liquid for lower impact
cost. EG.

Diversification – Diversification, by putting stocks of various sectors that

reflect the economy, is used to cancel out stock noise which is essentially the
individual stock fluctuations and to reduce investor’s risks. An index must
thus have a balanced representation of all sectors.

3 Copyrights© Puneet Jain

2009-2011
Optimum size - More stocks lead to greater diversification but the limiting
factor is the size of the index. Increasing number of stocks in an index from
10 to say 30 gives a sharp reduction in risks but increasing the number
beyond a point does very little in risk reduction. Further it might lead to
addition of illiquid stocks. For example, the optimal size for BSE Sensex is
30.

Market Capitalization: The index should include primarily the stocks of

companies that have significant market capitalization with respect to the
index such that any major change in the price of the stock is reflected in the
index. For example in BSE 30 Index, the scrip must have a minimum of
0.5% of the market capitalization of the Index.

Averaging - Every stock primarily moves for two reasons: The news about
the company and the news about the country. An ideal index is affected only
by the latter, that is the news of the economy and the effect of the former is
knocked out by proper averaging.

Major International Indices are as follows :

S.No Country Region Index Symbol

1 China Shanghai Composite SC
2 Hong Kong Hang Seng HS
3 India BSE - 30 Sensex
4 India NSE S&P CNX NIFTY

5 Japan Nikkei 225 NIKKEI

6 Singapore Straits Times ST
7 USA Dow Jones Industria Average DJIA
9 USA S&P 500 S&P
FTSE International (London
10 United Kingdom Stock Exchange), FTSE

4 Copyrights© Puneet Jain

2009-2011
 Major Asian Indices
Sensex (BSE 30) Country : India
The index includes 30 companies which figure in top 100 in terms of market
capitalization and are also among the leaders in their industry groups.
Presently the following are the constituent companies: ACC, Infosys, ICICI
Bank, Dr. Reddy’s Lab, SBI, CIPLA, Zee Telefilms, Nestle India, RPL, RIL,
HCL Tech., Bajaj Auto, BHEL, Castrol, BSES, Colgate Palmolive,
Hindalco, Grasim, Glaxo, Hero Honda, Gujrat Ambuja Cements, HLL,
HPCL, ITC, L&T, MTNL, Ranbaxy, TISCO, TELCO and Satyam.

Standard and Poor’s CRISIL NSE Exchange NIFTY Country : India

S&P CNX NIFTY is an S&P endorsed Stock Index owned by the India
Index Services Ltd. (IISL). It is a highly diversified index, accurately
reflecting the overall market conditions and is composed of 50 liquid stocks.
It is backed by solid economic research and three extremely respected
organizations (NSE, CRISIL and S&P).

Shanghai Composite: Country : China

The constituents for SSE Composite Index covers all listed stocks of A
Group and B Group shares at Shanghai Stock Exchange.The base date for
SSE Composite Index is December 19, 1990. The base value was set to 100.
The index was launched on July 15, 1991.

NIKKEI 225 : Country : Japan

The NIKKEI 225 Index is calculated and disseminated by Nihon Keizai
Shinbum Inc. It measures the composite price performance of 225 highly
capitalized stocks trading on the Tokyo Stock Exchange. It is price-
weighted, as opposed to market-cap or fundamental-weighted.

Straight times : Country : Singapore

The Straits Times Index (STI) comprises of the stocks of 30 representative
companies listed on the Singapore Exchange. The index is calculated based
on market-value weighted stock market index.

HANG SENG : Country : Hong Kong

The Hang Seng Index is a freefloat-adjusted market capitalization-weighted
stock market index in Hong Kong. It is used to record and monitor daily
changes of the largest companies of the Hong Kong stock market and is the

5 Copyrights© Puneet Jain

2009-2011
main indicator of the overall market performance in Hong Kong. These 45
companies represent about 67% of capitalization of the Hong Kong Stock
Exchange

TAIWAN – 50 : Country : Taiwan

The TWSE Taiwan 50 Index was started on October 29, 2002. The
collaboration of Taiwan Stock Exchange Corporation (TWSE) and FTSE
International Limited created the first tradable index for the Taiwan stock
market. It keeps track of the top 50 companies by total market capitalization.

Major U.S Indices

Dow Jones
The Dow Jones Industrial Average (DJIA), which was first published in
1884, is based on a narrow set of stocks and a different calculation
methodology. The DJIA is a price-weighted average tracking the stock
performance of 30 blue chip companies. While the Dow Jones Industrial
Average is adjusted for stock splits and referred to as an index in the
financial media, the DJIA measures average price movement only, without
regard to market value. As a result, the higher-priced stocks within the DJIA
often have a greater effect on the DJIA Index than the lower-priced ones.

SP500
The Standard & Poor's 500 is a market-value-weighted index (shares
outstanding multiplied by stock price) of 500 stocks that are traded on the
New York Stock Exchange (NYSE), American Stock Exchange (AMEX),
and the NASDAQ National Market System. The weightings make each
company's influence on Index performance directly proportional to that
company's market value. It is this characteristic that has made the Standard
& Poor's 500 Index the investment industry's standard for measuring the
performance of actual portfolios

Major European Indices

FTSE Country : UK
The FTSE Group is a joint venture between the Financial Times and the
London Stock Exchange. It is calculated in real-time and published after an

6 Copyrights© Puneet Jain

2009-2011
interval of 15 seconds. FTSE 100 companies correspond to 81% of the
market capitalisation of the whole London Stock Exchange. It is the most
widely used UK stock market indicator.

CAC Country : France

The CAC 40 is a benchmark French stock market index. As name suggests
the index comprises of the 40 most significant values among the 100 highest
market caps on the Paris Bourse which has now been changed to Euronext
Paris.

There are various other Stock indices all over the world but these are some
of the most important indices which is looked by every prudent trader of the
stock exchange and especially in India these are fairly watched indices.

7 Copyrights© Puneet Jain

2009-2011