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A presentation on index construction method submitted to: Javed sir submitted by: Naheda Meghraji(2010) Mona Shah(2017) Silver

Patel(2023) Vipul Patel(2018)

 The SENSEX and other indexes  The BSE SENSEX (SENSitive indEX)is a basket of 30 stocks representing a sample of large. The index is widely followed by investors who are interested in Indian stock markets. liquid and representative companies. During market hours. prices of the index scrip. at which trades are executed. are automatically used by the trading computer to calculate the SENSEX every 15 seconds and continuously updated on all trading workstations connected to the BSE trading computer in real time . The base year of SENSEX is 1978-79 and the base value is 100. Stock indexes are updated constantly throughout the trading day to provide instant information.WHAT IS A STOCK MARKET INDEX?  Stock market indexes provide a consolidated view of how the market is performing.

Bharti Airtel Ltd. Jindal Steel & Power Ltd.Cont……. DLF Ltd.             30 stocks that represent SENSEX. Hindustan Unilever Ltd. Cipla Ltd. Hero Honda Motors Ltd. Bharat Heavy Electricals Ltd. . Hindalco Industries Ltd.. HDFC HDFC Bank Ltd.(Updated on 7/7/2010) ACC Ltd.

NTPC Ltd.              ICICI Bank Ltd. ITC Ltd. Reliance Infrastructure Ltd.. Larsen & Toubro Limited Mahindra & Mahindra Ltd. Maruti Suzuki India Ltd. Jaiprakash Associates Ltd. Infosys Technologies Ltd. ONGC Ltd.Cont……. Reliance Communications Limited Reliance Industries Ltd. State Bank of India .

even if they are out of focus. HANG SENG index for Hong Kong. Snapshots.  INDEX – both track US stock markets.  The SENSEX comprises of 30 companies representing different sectors and the broader NIFTY comprises of 50 companies from 24 sectors. FTSE 100 For UK. Yardstick for comparison. These indexes would give you an idea about how that particular sector is performing. In India the main indexes to be tracked are – The BSE SENSEX and The NSE NIFTY. KNOW IT A stock market index is a statistical indicator which gives an idea about how the stock market is performing. It gives an idea about where the financial growth of a country is headed to. All these indexes serve the same purpose. KOSPI for Korea.WHAT’S GOOD ABOUT INDEXES       Indexes provide useful information including: Trends and changes in investing patterns. SHANGHAI for China etc. NIKKEI 225 is the stock market index of Japan.  . There are many other indexes that track particular sectors of the economy.

STOCK INDEX.  The stock index function as an indicator of the general economic scenario of a country / region / sector. . If. If the stock market indices are growing. If the FTSE 100 records a jump over a period of time.  For example – The FTSE 100 ( the stock index of London stock exchange) is constructed from the top 100 companies trading in the London stock exchange. it indicates that most of the top 100 companies in England are doing well at that point of time and that the investors are positive about putting their money in England. it indicates that the economy of the country is in troubled waters. however. there is a plunge in the stock market index over a period of time . It’a also an indication of what the corporates in that country are facing.  A stock index is created by selecting a group of high performing stocks . it indicates that the overall general economy of the country is stable and that the investors have faith in the growth story of the economy.

Different Weighting Methods for Index Construction  A price weighted index  The equal – weighted index  A market capitalization – weighted  A float adjusted market capitalization  The fundamental – weighted .

.  The divisor of a price weighted index is adjusted for stock splits and changes in the composition of the index when securities are added or removed.  A major advantage for price weighted index is that its computation is simple.A price weighted index  A price weighted index is simply an arithmetic average of the prices of the securities include in the index.  Two major price weighted indexes are the Dow Jones Industrial Average (DJIA) and the Nikkei Dow Jones Stock Average. such that the index value is unaffected by such changes.

would be matched by the return on a portfolio that had equal currency amounts invested in each index stock.  As with the price weighted index.The equal – weighted index  The equal – weighted index is calculated as the arithmetic average return of the index stocks and.  Hence. each of the constituents of the index should have equal amount of exposure from the portfolio. an advantage of an equal-weighted index is its simplicity. for a given time period. .

(current stock price times the number of shares outstanding) as a proportion of the total market capitalization of all the stocks in the index.  . Since the weight of an index stock is based on its market capitalization.  This weighting method represents the changes in aggregate investors’ wealth more closely than price weighting. a market capitalization – weighted index does not need to be adjusted when a stock splits or pays a stock dividend.A market capitalization – weighted index  A market capitalization – weighted index has weights based on the market capitalization of each index stock.

are based on the proportionate value of each firm’s shares that are available to investors to the total market value of the shares of the index stocks that are available to investors.A float adjusted market capitalization  A float adjusted market capitalization – weighted index is constructed like a market capitalization – weighted index.  The distinct advantage of this method is that the weight represents the total market value in proportionate manner which underlines the available float for the company.  Hence.  The weights. companies which have higher promoter holdings or insider stake will have relatively less weight. . however.

The fundamental – weighted  The fundamental – weighted method is where weights are based on firm’s fundamentals.  The fundamental weighted method can be based on a single fundamental factor or a combination of factors. . growth or cash flow. such as earnings.  In contrast to market capitalization index weights.  This method actually negates the biasness of the market capitalization method towards the share price performance of the overvalued firms to the shares of the undervalued firms. dividend. these weights are unaffected by the share price movement of the index stocks.

NIFTY  The NSE S&P CNX Nifty 50 or the NIFTY as it is commonly known is the prime index of the National Stock exchange. The national stock exchange is the largest stock exchange in India in terms of trading volume and daily turnover. . The 50 stocks that made up the NIFTY index are the prime stocks in terms of market capitalization and daily trading activity. NIFTY is one of the two most significant stock indexes in India and the other one is the SENSEX. The NIFTY index is made up of 50 different stocks from all the listed company at the National stock exchange.

 The NIFTY index at present is owned and managed by the India Index Services and Products Ltd. which is the leading company in the world in Index management. The India Index Services and Products Ltd. The company has a license agreement with the Standard & Poor's (S&P). . The NIFTY index is used for purposes like benchmarking fund portfolios. CRISIL is the first Indian company to specialize for index management. (IISL).Cont……. (IISL) is joint venture between the national stock exchange and the CRISIL. index based derivative trading and managing index funds..

with stocks from different sectors in the index it makes the NIFTY more stable that is not greatly influenced by the fall in certain sector. .  The 50 stocks that are part of the NIFTY index are reviewed and modified from time to time on the basis of the present market condition and the position of respective companies.Cont……. So it can be said that NIFTY index has a good mix of different sectors and reflects the overall market condition rightly. At present the 50 companies in the NIFTY index represent as much as 21 different sectors. Moreover. On the basis of these factors and the present market capitalization of the companies prime companies from different sectors are selected for the NIFTY index.

 This committee is made up of highly placed experts and professionals from the field finance and industry who are well aware of the Indian stock market scenario.Sensex  Bombay stock exchange or BSE is the largest stock exchange in India in terms of number of listed companies in the exchange and the market capitalization of the listed companies  The prime index of the Bombay Stock Exchange is the BSE 30 that is popularly known as the Sensex. The BSE index committee decides on which stock to include in the Sensex and which stock should be removed from the Sensex. . Over the years of course these stocks have changed time and again according to the condition of the market and economy of the country.  The selection of the stocks is made on the basis of market capitalization and liquidity of stocks. The Sensex is made with highly liquid stocks of 30 largest companies in terms of market capitalization.  The Sensex was first constructed in the 1986 on 1st of January with just 30 stocks.

The companies that are included in Sensex have huge market capitalization. In Sensex there are companies like ACC. .Cont……  When selecting the stocks for constructing the Sensex there are so many factors that are considered to ensure that the Sensex portrays the condition of the market and the overall economic scenario of the country. By including these prestigious companies it is ensured that the Sensex catches the exact pulse of the industry. The first thing that is important while selecting the stocks for including them in the Sensex is of course the market capital of the companies.  For this purpose only the reputed and well known large enterprises are considered. and Wipro that are leaders in their respective sectors. Reliance.  But in the process it is also ensured that the Sensex is not completely depend on a few companies or the sectors.

Thank you .