Stock Market Indices

Unit 1

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What is an Index & Stock Market
Index
• Index is a tool which measures change.
• Example:
• Consumer Price Index(CPI)-Measures Inflation
• A stock market is a secondary market and a place where long
term/Capital market securities are being bought and sold
• A stock market index combines several stocks to create one
aggregate value that investors use to measure the change in
stock market
• Index denotes the direction of the entire market.
• Index consists of High market capitalization and High
liquidity shares.
• It is also used to identify the trend in the stock market

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Stock Market Index
• In the Indian context, there are two major stock market
indexes used for evaluating markets: SENSEX and NIFTY.
• Indian investors can track changes in these indexes
values over time and use it as a benchmark against
which to compare their own portfolio returns.

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Uses of Stock Market Indices
It helps us to know how the entire stock market is performing
as a whole
Indices help to recognize the trends in the market.
Index can be used as a benchmark for evaluating the
investors portfolio.
Impacts of various economic policies are reflected in the
indices.
Investors can use the indices to allocate their money with
help of indices.
Technical Analyst use indices to predict the future movement
of stock market

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Types of Stock Market Indices
• Benchmark Index: NSE Nifty 50 & BSE Sensex 30
• Sectoral Index: Bank Nifty, Nifty IT. Nifty FMCG etc
• Strategy Indices: NIFTY50 EQUAL WEIGHT, NIFTY
ALPHA LOW-VOLATILITY 30

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Formation of Stock Market Indices
• A stock market index is formed by combining equities
with similar market capitalizations, business sizes, or
industries.
• The index is thereafter computed based on the stock pick.
• Each stock in the index is given a certain weightage
depending on its current market price or market
capitalization.
• The weight defines the impact of stock price fluctuations
on the index value.

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Types of Stock Market Index
Formation
• Price Weighted Index: An index reflecting the sum of the
prices of the sample shares in a certain day with
reference to a base year.

• Wealth Index: Wealth index are calculated by weighted

market capitalization. This gives an idea about the real
wealth created for shareholders over a period of time

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Calculation of SENSEX & NIFTY
• SENSEX has adopted the market capitalization
weighted method in which weights are assigned
according to the size of the company. Larger the size,
higher the weightage.
• Total value of market shares at the time of creation of
index is assumed to be100 points.
• Time of creation of Sensex index is 1979
• NIFTY is calculated using the same methodology adopted
by the Bombay Stock Exchange in calculating the
SENSEX.
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Difference between Nifty & Sensex

• Sensex Base Year is 1979 vs Nifty’s Base year is 1995

• The Base value of Sensex is 100 vs The Base value of Nifty is

1000

• Sensex has 30 Stocks vs Nifty has 50 Stocks

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Calculation of Base Value & Index Value
Company Share price No.Of Free Float Market Cap Weighted Market
Shares Cap
A 100 1,000 1,00,000 24.479
B 112 10,000 11,20,000 274.174
C 110 6,000 6,60,000 161.568
D 105 13,000 13,65,000 334.149
E 120 7,000 8,40,000 205.630
40,85,000 1,000

Company Share price No.Of Free Float Market Cap Weighted Market
Shares Cap
A 223 1800 4,01,400 24.479
B 156 10,000 15,60,000 274.174
C 55 9,000 4,95,000 161.568
D 115 20,000 23,00,000 334.149
E 142 10,000 14,20,000 205.630
61,76,400 1,000 10
Differences between the Indices
• Number of the component Stocks
• Composition of Stocks
• Weight of Stocks
• Choice of Base Year

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Criteria for Selection of Stocks in
Index

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Criteria for Selection of Stocks in
Index
• Industry Representation: The Company Share should
reflect the present state of the industry and its future
prospects. Companies chosen should be representative of
the industry.
• Track Record: The Company should have acceptable
track record of good performance in terms of Corporate
governance and dividend payment
• Quantitative criteria: The Scrip should be one among
top 100 companies listed by Market capitalization.
• Liquidity: The Company shares should be highly liquid
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