MARKET INDICES

INDEX:

An index is used to provide information about the price movements of products in the financial,
commodities or any other markets. Financial indices are constructed to measure price movements of
stocks, bonds, T-Bills etc.

Stock market indices are meant to capture the overall behavior of equity market. They are created by
selecting a group of stocks that represent the whole market or specified sector or segment of market.

BENEFITS OF STOCK MARKET INDICES:

 They provide a historical comparison of returns of money invested in stock market against other
forms of investment.
 They can be used as standard against which we can compare the performance of equity fund.
 They act as lead indicator of the economy’s performance and reflect highly-up to date
information

INDEX FUNDS:

They are source of investment for investor looking at long term, less risky form of investment. Low
violatility accounts for the high success of index funds.

SENSEX:

“The Stock Exchange, Mumbai” was formed in 1875 by 318 people, each investing a princely amount of
Rs 1.In 1986, The Stock Exchange, Mumbai came out with stock index that subsequently become the
barometer of Indian stock market.

HIGHLIGHTS:

 SENSEX is a basket of 30 constituent stocks representing a sample of large, liquid and

representative companies.
 The base year of SENSEX is 1978-79 and the base value is 100.
 The Sensex index was initially calculated based on the “full market capitalization “methodology
but was shifted to the “free-floating methodology”.

SENSEX CALCULATION METHODOLOGY:

Here the level of index indicates the free-float market value of 30 component stocks relative to a base
period.

Step 1: Determination of market capitalization

Market Capitalization = Price of stock times the number of shares issued by the company.

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Step 2: Determination of free-float market capitalization

Free-Float market capitalization = market capitalization * free float factor.

Step 3: Determination of Sensex

Sensex = (Free Float market capitalization of 30 companies)/Index divisor.

Note: Index divisor is the only link to the original base period value of the SENSEX.

BSE-100 Index:

It was complied and published on 3rd January 1989 by Bombay Stock Exchange due to need for a more
broad-based index. This would enable the reflection of stock prices on national scale.

Salient Features:

Coverage: It has close to 100 companies pertaining to all kinds of industries.

Base Year: The FY 1983-84 has been chosen as the base due to price stability and proximity to index
series.

Method of Compilation: The method used id same as to that of BSE sensitive index.

BSE-500 Index and sectoral indices:

 Bombay Stock Exchange Ltd has constructed a new index called as BSE-500 consisting of 500
scrips.The construction of this new index was mainly due to changing pattern of the economy and
market.
 BSE-500 represents 93% of total market capitalization of Bombay stock exchange.
 BSE-500 index has been calculating on full market capitalization and has shifted to free-float
methodology.
 BSE started 5 sectoral indices i.e BSE IT Sector index, BSE FMCG Sector index, BSE Capital
goods sector index, BSE consumer durables sector index and BSE healthcare sector index.
 BSE launched “sector series (90/FF)” indices to provide quality sector benchmarks. This includes
“BSE auto index” ,” BSE Bankex”,”BSE Capital goods index”,”BSE consumer durables
index”,”BSE FMCG index”,”BSE Healthcare index”,”BSE IT index”,”BSE Metal index”,”BSE
oil and gas index”,” BSE mid cap index”,”BSE small cap index”.

BSE BANKEX:

High returns on assets in Indian banking sector , sizeable gains in expanding into consumer credit and
policy actions posting significant profits have impacted the performance of bank stocks significantly and
the need arose for index exclusively for banks.Thus BSE launched BSE BANKEX.

Features:

 Tracks the performance of leading banking sectors.

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  Based on free float methodology
 Base date is 1st January 2002 and base value is 1000 points.
 Index is disseminated on a real time basis through BSE online trading terminals(BOLT)

Free Float Methodology:

Free Float is defined as that proportion of total shares issued by the company that are readily available
for trading in the market.

Following categories are excluded from the definition of free-float:

 Holdings by founders/directors/acquirers which has 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.
 Equity held by group companies.

Free Float Factor is a multiple with which the total market capitalization of a company is adjusted to
arrive at the free-float market capitalization.

Maintenance of Sensex:

The index cell of exchange keeps a close watch on the events and carries out daily maintenance.

Adjustments of Rights Issues: An proportionate adjustment is made to the base market capitalization
when a company issues right shares as the free float market capitalization is increased by the number of
additional shares issued on the theoretical price.

Adjustments for Bonus Issue: When a company issues bonus shares the market capitalization of that
company does not undergo any changes. Only the “number of shares” in the formula is updated.

Other Issues: Base market capitalization adjustment is required when new shares are issued by the way
of conversion of debentures, mergers, spin-offs.

Base Market Capitalization Adjustment:

Old New Base Market Capitalization = Old base Market Capitalization * (New Market Capitalization /old market
capitalization)

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Sensex scrip selection criteria:

The general guidelines for the selection of sensex scrip are mentioned below:

1. Listed history
2. Trading frequency
3. Final Rank
4. Market capitalization weightage
5. Industry Representation
6. Track Record

Total Returns Index: The price index doesn’t consider the returns arising from dividend receipts. Only
capital gains arising due to price movements of constituents stocks are indicated in price index. So

Total Returns Index is an index which includes dividend received.

Methodology for calculation of Total return Index (TR):

The following information is prerequisite for calculation of TR index:

1. Price index close

2. Price index returns
3. Dividend payouts in rupees
4. Index base capitalization

Index dividend = (dividend payout (Rs)/ Base Cap of index (Rs))* 100

Total Return Index = [Prev TR Index + (Prev TR Index * Index Returns)] +

[Indexed dividends + (Indexed dividends * Index Returns)]

Note: Base for both price index and TR index will be the same.

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