calculation of stock index

8/8/2019 Calculation of Stock Index

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CALCULATION OF STOCK INDEX

PRESENTED BY :-

SHREY JINDAL

960


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MEANING OF STOCK

Stock is the smallest unit of ownership of a company inother words stock is a share in the ownership of thecompany. Stock is also called as share and equity. If aperson purchases

stocks of a company it means that he is one of theowners of the company, and ownership increases as hegoes on purchasing more amount of stocks.

Technically :

shareholder of a company owns a small part of everyassets of the company such as building, furniture,trademarks, etc. A share holder holds ownership in alltangible and intangible assets of the company.


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STOCK INDEX


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SENSEX

Sensex stands for sensitive index, itrepresents BSE (Bombay Stock Exchange).

Sensex indicates all major companies of BSE.

Sensex is calculated using share prices of 30major companies which are listed in BSE.

If the Sensex goes up it means that share

values of most of the major companies havegone up and vice versa.

SENSEX is calculated for every 15 seconds.


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NIFTY

Nifty indicates NSE(National Stock Exchange)

It is the leading index for large companies in

the National Stock Exchange of India. It consists of 50 companies representing 24

sectors of the economy.

NIFTY represents approximately 47% of thetraded value of all stocks on the National

Stock Exchange.


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CRITERIA FOR SELECTING STOCKS TO

CALCULATE INDEX

Listing history: The Company should have listing historyon BSE for at least one year

Track record: company should have good track record.

Market capitalization: Company should be one among100 market capitalizations of BSE, and each companyshould have more than 0.5% of total marketcapitalization of BSE index.

Frequency of trading: company stocks should be tradedon each and every trading day for the last one year.

Industrial representation: company should be a leaderin the industry it represents.


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CALCULATION OF SENSEX AND NIFTY

Sensex calculation is practiced since 1986. Initially ithad been calculated using total market capitalizationmethod but the methodology changed to free floatmarket capitalization since from 2003.

Hence these days Sensex is calculated using free floatmarket capitalization of 30 major BSE listed companiesand by using base value 100 (1978-79).

NIFTY is calculated using free float marketcapitalization methodology

Base year is 1995 and base value (index value) is 1000

Nifty represents stocks of 50 major companies of NSE.


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FREE FLOATMARKET CAPITALIZATION

METHODMARKET CAPITALIZATION Market capitalization is the total worth of all

outstanding (issued) shares of a company. It representsthe total worth of a company.

Market capitalization= No of shares outstanding xmarket price of share


Free float market capitalization is the total worth of all

shares of a company which are available for trading inthe open market.

These shares are called free float shares and areavailable for trading by anyone.


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Free float concept is an index construction methodology which makes use

of free float shares in the market.

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 OpenM

arket = 300Market 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


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SHARES WHICH DO NOT FALL UNDER THE

FOLLOWING CATEGORIES ARE

CONSIDERED AS FREE FLOAT (OPENMARKET)SHARES.

Government holding shares as promoters

Holdings by Directors/ Founders

Holdings through the FDI route

Stakes held by private corporate bodies or

individuals. Any cross holdings i.e. equity held by associate or

group companies.

Equity held by employee welfare trust.


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CALCULATION OF THE FREE FLOAT

FACTORS

Periodically, every listed company has to

submit holdings information i.e. who all are

holding the shares of the company, to the

exchange. Based on this free float factor for

each company is calculated.

Free float factor = No of shares available for

trading in the open market / Total No ofoutstanding shares of the company.


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FREE FLOAT FACTOR

Free float factor of each company has to berounded of to the higher multiple of 5 andcompany is considered among one of the freefloat range(ex: factor=0.08 rounded of = .1).


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FORMULA FOR SENSEX

SENSEX = (sum of free float market cap of 30major companies of BSE) X Index value in 1978-79 /Market cap value in 1978-79.

Example: suppose BSE index (SENSEX) consist ofonly two stocks such as X and Y Company X has 1000 outstanding shares out of

which only 500 are available for trading in openmarket.Market price of share is Rs.100.

Company Y has 2000 outstanding shares out ofwhich 1000 shares are held by promoters andremaining 1000 are free float shares (open marketshares).Market price of share is Rs.50.


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Sum of free float market cap of company X and company Y

is 50000+50000 = 100000

Assume market cap during 1978-79 is 25000

SENSEX = (sum of free float market cap of 30 majorcompanies of BSE) X Index value in 1978-79 /Market cap

value in 1978-79.

formula;

100000*100/25000 = 400


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CALCULATION OF NIFTY

The same method is used to calculate NSE niftybut 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 majorstocks of NSE) X Index value in 1995 /market capvalue in 1995.


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calculation of stock index

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