STOCK MARKET INDICES

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.

According to the Securities Contracts(Regulation)Act ,

1956,which is the main law governing stock exchanges in
India, stock exchange means any body of individuals,
whether incorporated or not, constituted for the purpose of
assisting, regulating, or controlling the business of buying,
selling or dealing in securities.
In stock exchanges , continuous trading in securities takes
place and the trade occurs at different prices. As a result
even on a single day, prices of securities may fluctuate.
On any trading day, four prices can be easily
identified,namely,opening price, closing price, the highest
price of the day and the lowest price of the day. Ordinarily
prices move in a cyclical fashion, alternatively showing
increasing and decreasing tendencies.
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.

Alternatively, an index may also be considered as an

instrument (after all it can be traded) which derives its
value from other instruments or indices. The index may be
weighted to reflect the market capitalization of its
components, or may be a simple index which merely
represents the net change in the prices of the underlying
instruments. Most publicly quoted stock market indices are
weighted.
STOCK MARKET INDICES

Stock market indices are useful in understanding the level

of prices and the trend of price movements of 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 for giving proper weights to

different stocks on the basis of their importance in the
economy.

A stock market index act as the indicator of the

performance of the economy or a sector of the economy.
STOCK MARKET INDICES:USEFULNESS
Stock market indices are the barometer of the stock market.
BSE SENSEX,NSE-50 etc are some of the market indices.

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.
 CRITERIA FOR SELECTING STOCKS TO CALCULATE
INDEX
Listing history: The company should have listing history on
BSE for at least one year
Track record: The company should have listing history
Market capitalization: Company should have one among 100
market capitalizations of BSE, And each company should
have more than0.5% of total market capitalization of BSE
INDEX
Frequency of trading: Company stocks should be traded on
each and every trading day for the last one year
Industrial representation: Company Should be a leader in
the industry it represents
Market Capitalization
Market 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 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:
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 100 Rs.

Here;
Total Shares = 10000
Shares Held by Government = 2000
Shares Held by Directors = 5000
Shares available in the Open Market = 3000
Market price of share = Rs 100

Here total market capitalization of the company is 10,000 X Rs100

=Rs 10,00,000 and
Free float market capitalization of the company is 3000 X Rs100
=Rs 300,000
Calculation of SENSEX and NIFTY
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
from 2003. Hence these days 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.

Formula for Sensex

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.
Example:
Suppose BSE index (SENSEX) consist of Calculation of Market Capitalization
only two stocks such as X and Y
Issued
Company X has 10000 outstanding Stock Stocks Market price Market Cap.
shares out of which only 5000 are X 10000 100 1000000
Y 5000 50 250000
available for trading in open
market. Market price of share is Rs.100.
Calculation of Free Float market
Company Y has 5000 outstanding capitalization
shares out of which 2000 shares are
held by promoters and remaining 3000 Open Market
are free float shares (open market Stock Stocks Market price Market Cap.
X 5000 100 500000
shares). Market price of share is Rs.50
Y 2000 50 100000

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 value in
1978-79 / Market cap value in 1978-79.
The same method is used to calculate 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 flow market cap of 50 major
stocks of NSE) X
Index value in 1995 / market cap value in
1995.
 BOMBAY STOCK EXCHANGE BSE
Bombay Stock Exchange is the oldest stock
exchange in Asia with a rich heritage of over 133
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 133 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.
On 25 July, 2001 BSE launched DOLLEX-30, a dollar-linked version of SENSEX.
As of 21 April 2011, the market capitalization of SENSEX was about 29,733 billion
(US$538 billion) (42.34% of market capitalization of BSE), while its free-float
market capitalization was 15,690 billion (US$284 billion).
Presently the following are the
constituent companies:
ACC, Infosys, ICICI Bank, Dr. Reddys
Lab, SBI, CIPLA, Zee Telefilms, Nestle
India, RPL, RIL, HCL Tech., Bajaj Auto,
BHEL, Castrol, BSES, Colgate Palmolive,
Hindalco, Grasim, Glaxo, Hero Honda,
Gujarat Ambuja Cements, HLL, HPCL,
ITC, L&T, MTNL, Ranbaxy, TISCO, TELCO
and Satyam.
 BSE INDICES
BSE 100

BSE 200

BSE IPO

BSE Mid Cap and BSE Small Cap

NATIONAL STOCK EXCHANGE (NSE)

The National Stock Exchange of India

(NSE) situated in Mumbai - is the largest
and most advanced exchange with 1016
companies listed and 726 trading
members.
The NSE is owned by the group of leading
financial institutions such as Indian Bank
or Life Insurance Corporation of India.
National Stock Exchange Indices

The major stock market indices available at the National Stock

Exchange(NSE) are:
S and P CNX Nifty , CNX Nifty Junior , S and P CNX 500 , CNX
Midcap 200 , S and P CNX Defty

S and P CNX Nifty

It is an index calculated with a well diversified sample of fifty
stocks representing 23 sectors of the economy. The base period
selected for nifty is the close of prices on November
3,1995,which marks the completion of one year of operations of
NSEs capital market segment. 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 Poors(S
and P),who are world leaders in index services.
CNX Nifty Junior
It is composed of the next most liquid fifty securities so much so S
and P CNX Nifty and CNX Nifty Junior together account for the
hundred most liquid securities traded at NSE. The two indices are
constituted in such a way as to be disjoint sets that is a stock will
never appear in both the indices at the same time.

CNX Midcap 200

It is designed to capture the movement of the mid cap segment or
medium- sized capitalization companies. The medium capitalization
segment of the stock market is being perceived increasingly as an
attractive investment segment with high growth potential.
The regional stock exchanges also bring out stock indices
calculated from stocks listed and traded at those exchanges. Many
prominent financial dailies also bring out their own stock market
indices.
Every Mountain top is Within
Reach if You Just Keep
Climbing
Keep Going.