CALCULATION OF STOCK INDEX

PRESENTED BY :-
SHREY JINDAL
960
 MEANING OF STOCK
• Stock is the smallest unit of ownership of a company in
other words stock is a share in the ownership of the
company. Stock is also called as share and equity. If a
person purchases
• stocks of a company it means that he is one of the
owners of the company, and ownership increases as
he goes on purchasing more amount of stocks.
• Technically :
– shareholder of a company owns a small part of every
assets of the company such as building, furniture,
trademarks, etc. A share holder holds ownership in all
tangible and intangible assets of the company.
STOCK INDEX
 SENSEX
• Sensex stands for “sensitive index”, it
represents BSE (Bombay Stock Exchange).
• Sensex indicates all major companies of BSE.
• Sensex is calculated using share prices of 30
major companies which are listed in BSE.
• If the Sensex goes up it means that share
values of most of the major companies have
gone up and vice versa.
• SENSEX is calculated for every 15 seconds.
 NIFTY
• Nifty indicates NSE(National Stock Exchange)
• It is the leading index for large companies in
the National Stock Exchange of India.
• It consists of 50 companies representing 24
sectors of the economy.
• NIFTY represents approximately 47% of the
traded value of all stocks on the National
Stock Exchange.
 CRITERIA FOR SELECTING STOCKS TO
CALCULATE INDEX
• Listing history: The Company should have listing history
on BSE for at least one year
• Track record: company should have good track record.
• Market capitalization: Company should be one among
100 market capitalizations of BSE, and each company
should have more than 0.5% of total market
capitalization of BSE index.
• Frequency of trading: company stocks should be traded
on each and every trading day for the last one year.
• Industrial representation: company should be a leader
in the industry it represents.
 CALCULATION OF SENSEX AND NIFTY
• Sensex calculation is practiced since 1986. Initially it
had been calculated using total market capitalization
method but the methodology changed to free float
market capitalization since from 2003.
• Hence these days Sensex is calculated using free float
market capitalization of 30 major BSE listed companies
and by using base value 100 (1978-79).
• NIFTY is calculated using free float market
capitalization methodology
• Base year is 1995 and base value (index value) is 1000
• Nifty represents stocks of 50 major companies of NSE.
FREE FLOAT MARKET CAPITALIZATION
METHOD
MARKET CAPITALIZATION
• Market capitalization is the total worth of all
outstanding (issued) shares of a company. It
represents the total worth of a company.
• Market capitalization= No of shares outstanding x
market price of share
FREE FLOAT MARKET CAPITALIZATION
• Free float market capitalization is the total worth of all
shares of a company which are available for trading in
the open market.
• These shares are called free float shares and are
available for trading by anyone.
FREE FLOAT MARKET CAPITALIZATION
• Free float concept is an index construction methodology which makes use
of free float shares in the market.
• Example: Company ‘X’ issues 1000 shares, out of which 200 shares held by
government, 500 shares by directors of the company and remaining 300
shares are available in the open market for trading. Market price of share
is 10 Rs.
• Here;
Total Shares = 1000
Shares Held by Government = 200
Shares Held by Directors = 500
Shares available in the Open Market = 300
Market price of share = 10
Here total market capitalization of the company is 1000 X 10 = 10000 and
Free float market capitalization of the company is 300 X 10 = 3000
 SHARES WHICH DO NOT FALL UNDER THE
FOLLOWING CATEGORIES ARE
CONSIDERED AS FREE FLOAT (OPEN MARKET)
SHARES.
• Government holding shares as promoters
• Holdings by Directors/ Founders
• Holdings through the FDI route
• Stakes held by private corporate bodies or
individuals.
• Any cross holdings i.e. equity held by associate or
group companies.
• Equity held by employee welfare trust.
 CALCULATION OF THE FREE FLOAT
FACTORS
• Periodically, every listed company has to
submit holdings information i.e. who all are
holding the shares of the company, to the
exchange. Based on this free float factor for
each company is calculated.
• Free float factor = No of shares available for
trading in the open market / Total No of
outstanding shares of the company.
 FREE FLOAT FACTOR
• Free float factor of each company has to be
rounded of to the higher multiple of 5 and
company is considered among one of the free
float range(ex: factor=0.08 rounded of = .1).
 FORMULA FOR SENSEX
• SENSEX = (sum of free float market cap of 30
major companies of BSE) X Index value in 1978-
79 / Market cap value in 1978-79.
• Example: suppose BSE index (SENSEX) consist of
only two stocks such as ‘X’ and ‘Y’
– Company ‘X’ has 1000 outstanding shares out of
which only 500 are available for trading in open
market. Market price of share is Rs.100.
– Company ‘Y’ has 2000 outstanding shares out of
which 1000 shares are held by promoters and
remaining 1000 are free float shares (open market
shares). Market price of share is Rs.50.
• Sum of free float market cap of company X and company Y
is 50000+50000 = 100000
• Assume market cap during 1978-79 is 25000
• SENSEX = (sum of free float market cap of 30 major
companies of BSE) X Index value in 1978-79 / Market cap
value in 1978-79.
• formula;
100000*100/25000 = 400
 CALCULATION OF NIFTY
• The same method is used to calculate NSE nifty
but includes two major changes.
• Base year is 1995 and base value (index value) is
1000
• Nifty represents stocks of 50 major companies of
NSE.
• Formula for NIFTY
• NIFTY = (Sum of free flow market cap of 50 major
stocks of NSE) X Index value in 1995 /market cap
value in 1995.