Stock Market Indices What is a Stock Index

Stock Market Indices

What is a Stock Index l An index is used to summarize the price movements of a unique set of goods in the financial, commodity, forex or any other market place. l Financial indices are created to measure price movements of stocks, bonds, Tbills and other type of financial securities

Stock Index l. A stock index is created to provide investors with the information regarding the average share price movement in the stock market. l Broad indices are expected to capture the overall behavior of equity market and need to represent the return obtained by typical portfolios in the country

Uses of Indices l Lead indicator of the performance of the overall economy or sector of the economy l Barometer for the market behavior l Benchmark for portfolio performance l As an underlying for derivatives l Supports research work

World renowned Indices l Dow Jones Industrial Average l Nasdaq 500 l S&P 500 l FTSE l CAC l Sensex l Nikkei 500

Attributes of an Index l Capture behavior of portfolios l Include liquid stocks l Maintain professionally

Difficulties in Index Construction l Deciding on the no of stocks to be included l Selecting the appropriate weights l Selecting the base period and base value

Methods of calculating Indices l Market Capitalisation methodology l Free-Float Market Capitalisation l Price-Weighted Index l Equal Weighted Index

Free Float Market Capitalisation l It is the proportion of total shares issued by the company that are readily available for trading in the market l It excludes: Promoter’s holding, Government holding, strategic holding and other locked-in shares

Categories excluded from Free Float l l l l Holdings by founders/directors/acquirers which has a control element Holdings by persons/bodies with “Controlling Interest” Government holding as promoter/acquirer Holdings through the FDI Route Strategic stakes by private corporate bodies/ individuals Equity held by associate/group companies (cross holdings) Equity held by Employee Welfare Trusts Locked-in shares and shares which would not be sold in the open market in normal course

Scrip selection criteria l Listing History l Trading Frequency l Final Rank l Market Capitalization Weightage l Industry Representation l Track Record

Scrips for selection in NSE l Market Capitalisation l Liquidity (Impact Cost) l Floating stock

Indices of BSE l Market Index l Sector Index l Dollar Index

Indices of NSE l S&P CNX Nifty l S&P CNX 500 l Segment Indices

Index Maintenance l Index Committee - BSE l Index Cell - BSE l IISL – India Index Services & Products Ltd. - Company set up by NSE and CRISIL

Role of Stock Exchanges l Stock Exchange History l Changing in the listing rules l Reshaping of the SE landscape of India l SE ensures liquidity, transferability, active and growing market l What is a Stock Exchange

Stock Exchange “An association, organisation or 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” {SCR Act 1956, Sec 2(3)} l SE are regulated by SC(R)Act 1956, SC(R)R 1957, SEBI 1992 l To establish unitary control over all the SE by the Central Govt. with a view to making them really helpful for the economic development of the country. l