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Stock Market Indices

July 22, 2010  by: coooooolsid  Points: 20   Category: Money Market  Earning $0.80   Views: 1007

A stock index quantifies the performance of the stock market. It is a measuring tool of the stock market behaviour. The index reflects the day-to-day fluctuations in the stock prices. The index indicates whether the stock market is bullish or bearish.

         

Stock Index: A stock index quantifies the performance of the stock market. It is a measuring tool of the stock market behaviour. The index reflects the day-to-day fluctuations in the stock prices. The index indicates whether the stock market is bullish or bearish. When the market is going up, we call it bullish and when the market is going down, we call it bearish.

Index: BSE-SENSEX Base Period / Base Year: 1 April, 1979 Base Value: 100
Index: S&P CNX NIFTY Base Period / Base Year: 3 November, 1995 Base Value: 1000

Stock Exchange: Stock exchange is an organized and regulated market for the sale and purchase of various securities like equity shares, preference shares, derivatives, bonds, debentures etc., issued by companies.

Importance of Stock Indices


(1) Acts as a measuring tool of the stock market behaviour: Stock market behaviour refers to the direction in which the stock market will move in the near future. The index reflects the day-to-day fluctuations in the stock prices. The index indicates whether the stock market is bullish or bearish.
(2) Reflects the aggregate market performance: The index constitutes the largest, well established and financially sound companies listed on the stock exchange. These companies represent all major sectors of the Indian economy. Therefore, the performance of the index reflects the aggregate market performance.
(3) Helps in taking investment decisions: The index has wide acceptance among the investor community. It helps them to invest their hard earned money on the best companies so that they can earn good returns by taking the minimum possible risk.
(4) Attracts foreign investors: Apart from the domestic investors, the stock market index has wide acceptance among the foreign investors as well. A healthy and stable index indicates a healthy and stable economy. This attracts foreign investment for faster economic growth.
(5) Benchmark for funds performance: The index constitutes the largest, well established and financially sound companies representing all major sectors of the Indian economy. This makes it the ideal benchmark for fund managers to compare the performance of their fund portfolios.
(6) Index based derivative products: Different types of derivative products are becoming increasingly popular in financial markets all over the world. Index can be used as the underlying asset for various derivative products like futures and options.

Calculation of Stock Market Index


The index on a particular day is calculated as the percentage of the aggregate market value of the set of scrips constituted in the index on that day to the average market value of the same scrips during the base period. The average market value of the same scrips during the base period is otherwise known as the base value.

(1) Weighted Market Capitalisation Method: The market capitalisation of the constituent companies of the index is calculated. Market capitalisation is the product of market price of an equity share and the total number of equity shares outstanding in the market.

Market capitalisation = (Market price of one equity share) X (Total number of equity shares outstanding)

Weights are assigned to the constituent companies on the basis of their market capitalisation. Companies with higher market capitalisation will get more weightage and hence considered more influential.

(a) Full Market Capitalisation Method: The full or total market capitalisation of the constituent companies is taken into consideration. All the equity shares of the company are considered for the purpose of calculation of market capitalisation.
(b) Free-Float Market Capitalisation Method: Part of the full or total market capitalisation of the constituent companies are taken into consideration. In other words, only those equity shares which are available for the public for trading are taken into consideration.The equity shares held by the promoter group are not taken into consideration for the purpose of calculation of market capitalisation.

(2) Price Weighted Index Method: In this method the share prices of all the constituent companies of the index is aggregated for the purpose of calculation of the index.

(3) Equal Weightage Method: In this method the market capitals of all the constituent companies of the index are given equal weightage for the purpose of calculation of the index.

Major Stock Market Indices of India


The two major stock market indices of our country are (1) BSE-SENSEX: the benchmark index of the Bombay Stock Exchange and (2) S&P CNX NIFTY: the benchmark index of the National Stock Exchange.

BSE-SENSEX: BSE-SENSEX is the short form of BSE-Sensitive Index. BSE stands for the Bombay Stock Exchange. BSE-SENSEX is the benchmark index of the Bombay Stock Exchange. It is a Market Capitalisation Weighted index calculated by the Full Market Capitalisation Method.
It is the oldest index in India. It is in operation since 1 April, 1979 and was started with a base value of 100. It constitutes 30 largest, well established and financially sound companies listed on the Bombay Stock Exchange. The 30 constituent companies of the BSE-SENSEX represent all major sectors of the Indian economy.
It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. It has wide acceptance among individual investors, foreign investors and fund managers.

S&P CNX NIFTY: S&P CNX stands for Standard and Poor CRISIL NSE. NIFTY is the name given to the index. NSE stands for the National Stock Exchnage. S&P CNX NIFTY or simply NIFTY is the benchmark index of the National Stock Exchange. It is a Market Capitalisation Weighted index calculated by the Full Market Capitalisation Method.
It is the most professionally managed and scientifically designed index in India. It is in operation since 3 November, 1995 and was started with a base value of 1000. It constitutes 50 largest, well established and financially sound companies listed on the National Stock Exchange. The 50 constituent companies of the NIFTY represent 23 major sectors of the Indian economy.
It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. It has wide acceptance among individual investors, foreign investors and fund managers.




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