Stock market index

 Measures the overall market sentiment through a set of stocks that

are representative of the market.

 Functions
- Barometer of the equity market
- Benchmark for portfolio of stocks
- Underlying for futures and options contracts

 Methodology
1. Full market capitalization method
- no of shares * market price
Stock market index
2. Free float market capitalization
- % of shares that are freely available for purchase in the
markets.

- Lower weightage for closely held companies

- Superior
✓ rational, helps in designing a broad base index
✓ avoids multiple counting
✓ useful to active and passive fund managers
Stock market index
- Free float factors
✓ Assigned according to banding structure consisting of ten
bands into which a company falls, based on its % of shares in
free float.
✓ Weightage change : if more than 2%
✓ BSE : from 10 to 20
% free float Free float factor
>0 – 5 percent 0.05
>5 – 10 percent 0.10
>10 – 15 percent 0.15
>15 – 20 percent 0.20
Stock market index
3. Modified capitalization weighted
- Limit on the % weightage

4. Price weighted index

- Sum up price and choose a base date

5. Equal weightage

 Global index: Dow Jones industrial average, Nasdaq, S&P 500

Index, FTSE 100, MSCI Index
Major indices in India
1. BSE SENSEX
- Launched in 1986 with base year 1978-79
- 30 stocks
- Criteria : market capitalization, listed history, track record, no
of trades etc
- Revised
1997 : replaced 15 scrips
1998,2000,2002, 2007,2008,2009
- Only 8 original scrips
- ITC , Infosys and RIL
- 44% and 14 most imp sectors
Major indices in India
2. NSE NIFTY

- JV of NSE and CRISIL to devise indices of stock prices

- 1996,50 scrips
- Low imapct cost, high liquidity, market capitalization
impact cost : marking from (bid+ ask price)/2
99,101 ,102 : 2%
- Trade of 2 cr and impact cost of less than 1.5%