Index and its
calculation
By
Dr Raghu Kumari
There are thousands of companies listed on stock markets, making it almost impossible to monitor
each company.
This is why stock market indices are created.
Market indices bring together a select group of company stocks and regularly measures them to
show the performance of the overall market or a certain segment of the market.
In short, an index helps investors understand the health of the stock market, enables them to study
the market sentiment and makes it easy to compare the performance of an individual stock.
The Sensex and Nifty-50 are two popular benchmark indices that largely reflect the performance of
Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
To understand how each sector of the stock market is doing, there are sectoral indices such as Nifty
Bank. Nifty Auto etc.
BSE
S&P BSE SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-Weighted"
methodology of 30 component stocks representing large, well-established and financially
sound companies across key sectors.
The base year of S&P BSE SENSEX was taken as 1978-79. S&P BSE SENSEX today is widely
reported in both domestic and international markets through print as well as electronic
media.
It is scientifically designed and is based on globally accepted construction and review
methodology. Since September 1, 2003, S&P BSE SENSEX is being calculated on a free-float
market capitalization methodology.
The "free-float market capitalization-weighted" methodology is a widely followed index
construction methodology on which majority of global equity indices are based; all major
index providers like MSCI, FTSE, STOXX, and Dow Jones use the free-float methodology.
Market facts
Bombay Stock Exchange (BSE) in India has the highest number of
listed companies in the world with an estimated 5689 companies.
National Stock Exchange (NSE) of India has around 1750 companies.
The most expensive stock in world is the Warren Buffet’s Hathaway.
The reason for such a high price is that the company doesn’t splits the
shares.
The oldest stock exchange in the world is Amsterdam Stock Exchange,
which was established in 1602 by Dutch East India Company dealing
with the printed stocks and bonds.
Facts
• The terms “Bear” and “Bull” are thought to be originated from
the way of attacking by each animal, with the bull thrusting its
horn up in the air, while a bear swiping downwards.
• Historically, the middleman used to speculate on the future price
of the bearskins by selling them which they yet had to receive
from the tappers, with the expectation that the price will drop
• They used to call the middleman as bear jobbers and in short
“bears” which is known to describe the downturn in the market.
• As bull was assumed to be opposite of the bear at that time so it
was termed as the upward movement of the market.
NSE - Index
•NIFTY
•It is the leading index for large
companies in the National Stock
Exchange of India. Established in 1992.
•It consists of 50 companies representing
24 sectors of the economy.
•NIFTY represents approximately 47% of
the traded value of all stocks on the
National Stock Exchange.
• It is calculated using base year 1995 and
base index value 1000
Contd…
• CNX stands for the Credit Rating Information
Services of India Limited (CRISIL) and the National
Stock Exchange of India (NSE). These two bodies
own and manage the index within a joint venture
called the India Index Services and Products Ltd.
(IISL).
Contd..
• 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.
Contd..
•Example: Company ‘X’ issues 1000 shares, out of
which 200 shares held by government, 500 shares by
directors of the company and remaining 300 shares
are available in the open market for trading. Market
price of share is 10 Rs.
• Here;
•Total Shares = 1000
•Shares Held by Government = 200
•Shares Held by Directors = 500
•Shares available in the Open Market = 300
•Market price of share = 10
• Here total market capitalization of the company is
1000 X 10 = 10000 and
•Free float market capitalization of the company is
300 X 10 = 3000
•
• Free float factor = No of shares available for trading
Contd.. in the open market / Total No of outstanding shares
of the company.
• Free float factor of each company has to be rounded
of to the higher multiple of 5 and company is
considered among one of the free float range.
Contd.. • 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)
• 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.
Below given are the criteria for
selecting stocks to calculate Index
Listing history: The Company should have listing history on BSE for at least one year
Track record: company should have good track record.
Market capitalization: Company should be one among 100 market capitalizations of BSE,
and each company should have more than 0.5% 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.
Demo of Index
calculation with two
stocks
• Example: suppose BSE index (SENSEX) consist
of only two stocks such as ‘X’ and ‘Y’
• Company ‘X’ has 1000 outstanding shares out
of which only 500 are available for trading in
open market. Market price of share is Rs.100.
• Company ‘Y’ has 2000 outstanding shares out
of which 1000 shares are held by promoters
and remaining 1000 are free float shares
(open market shares). Market price of share
is Rs.50.
Example: suppose BSE index (SENSEX) consist of only
two stocks such as ‘X’ and ‘Y’
Company ‘X’ has 1000 outstanding shares out of which
only 500 are available for trading in open market. Market
price of share is Rs.100.
Company ‘Y’ has 2000 outstanding shares out of which
1000 shares are held by promoters and remaining 1000
are free float shares (open market shares). Market price
of share is Rs.50.
Calculation of Market Capitalization
Stock Issued Stocks Market price Market Cap.
X 1000 100 100000
Y 2000 50 100000
calculation
Contd..
Calculation of Free Float market capitalization
Stock Open Market Market price Market Cap.
Stocks
X 500 100 50000
Y 1000 50 50000
Here;
Sum of free float market cap of company X and company
Y is 50000+50000 = 100000
Assume market cap during 1978- 79 is 25000
Now Apply formula;
100000* 100/ 25000 = 400
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 NI FTY
NIFTY = (Sum of free flow market cap of 50 major stocks of NSE)
X Index value in 1995 / market cap value in 1995.
How the stock markets will
perform will depend on:
• The overall performance of S&P 500 (Broad-based
equity correlation).
• The price of Dollar (A rising dollar has implications
for all asset classes).
• Interest rates in India (Although RBI is cautious, it
may reduce rates in 2017).
• Mutual fund inflows (Rising inflows will hold the
market during corrections).
• GST Implications (end user gets benefit or not).
• Price of Crude Oil (It has formed a base at $45 and
$55 per barrel. Not good)
• GDP Growth rate (It has been standard QoQ, looks
like it will continue).
• Inflation (In control & stable. This can change if Oil
rallies).
• Progress of ongoing reforms which have not yet been
fully implemented.
TOP companies in
terms of market
capitalization??
