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NISM Chap 2

This document discusses different types of stock market indexes. It defines an index as a portfolio of securities that represents a market or portion of a market and serves as a benchmark. There are several types of indexes including market capitalization weighted indexes that give larger companies more influence, free float market capitalization weighted indexes that only consider publicly available shares, price weighted indexes where stock price determines influence, and equal weighted indexes that allocate equal amounts to each company. The document provides examples and explanations of how each index is calculated.

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58 views14 pages

NISM Chap 2

This document discusses different types of stock market indexes. It defines an index as a portfolio of securities that represents a market or portion of a market and serves as a benchmark. There are several types of indexes including market capitalization weighted indexes that give larger companies more influence, free float market capitalization weighted indexes that only consider publicly available shares, price weighted indexes where stock price determines influence, and equal weighted indexes that allocate equal amounts to each company. The document provides examples and explanations of how each index is calculated.

Uploaded by

Amarjeet Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Chapter 2

Understanding Index

AJ Institute of finance
What is Index?
 Index is a statistical indicator that measures
changes in the economy
 In financial markets, an index is a portfolio of

securities that represent a particular market


or a portion of a market
 It serves as a benchmark for portfolio

performance
 It is used as an underlying for financial

application of derivatives
 Eg : Nifty 50, BSE Sensex

AJ Institute of finance
Types of Index
 Market Capitalization weighted index
 Free Float Market Capitalization weighted

index
 Price Weighted index
 Equal weighted Index

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Market Capitalization weighted
index
 Companies with larger market capitalization
exert a greater impact on the index value.

 Companies with a smaller market


capitalization carry less significance.

AJ Institute of finance
Market Capitalization?

 Market Capitalization = Stock Price x No. of


Shares Outstanding

 Company A = 5 x 5,000,000 = $25,000,000

 Company B = 25 x 500,000 = $12,500,000

AJ Institute of finance
Market Caiptalization Eg :
 There are five stocks in an index.

 Base value of the index is set to 100 on the


start date which is January 1, 1995

AJ Institute of finance
AJ Institute of finance
Free Float Market Capitalization
Index
 The valuation of a company depends only on
the shares held publicly
 It does not include all shares, because some

shares are considered to be restricted or


closely held
 The one available for immediate trading is

categorized as free float


 Indian Index follow free float M Cap

AJ Institute of finance
Price Weighted Index
 A stock index in which each stock influences
the index in proportion to its price

 Stocks with a higher price will be given more


weight and therefore, will have a greater
influence over the performance of the Index.

AJ Institute of finance
AJ Institute of finance
Equal Weighted Index
 An equal-weighted index is a stock market
index – comprised of a group of publicly
traded companies – that invests an equal
amount of money in the stock of each
company that makes up the index.

 Thus, the performance of each company's


stock carries equal importance in determining
the total value of the index.

AJ Institute of finance
Impact Cost

AJ Institute of finance
Impact Cost
 Difference between the best buy and the best
sell orders is 0.50 ‐ called bid‐ask spread
 To Buy 3000 shares ideal price should be :

(4 + 4.5)/2 = 4.25
Actual Buy Price = (2000*4.5
+1000*4.55)/3000 = 4.517
Impact Cost for 3000 shares =
{(4.517-4.25)/4.25}*100 = 6.28%

AJ Institute of finance
Any Questions?

AJ Institute of finance

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