Mona Sapm Project Ppt

7/30/2019 Mona Sapm Project Ppt

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presentation

on

index construction methodsubmitted to:

Javed sir

submitted by:Naheda Meghraji(2010)

Mona Shah(2017)

Silver Patel(2023)

Vipul Patel(2018)


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WHAT IS A STOCK MARKET INDEX?

Stock market indexes provide a consolidated view of how themarket is performing. Stock indexes are updated constantlythroughout the trading day to provide instant information.

The SENSEX and other indexes The BSE SENSEX (SENSitive indEX)is a basket of 30 stocks

representing a sample of large, liquid and representativecompanies. The base year of SENSEX is 1978-79 and the base

value is 100. The index is widely followed by investors who areinterested in Indian stock markets. During market hours, pricesof the index scrip, at which trades are executed, areautomatically used by the trading computer to calculate theSENSEX every 15 seconds and continuously updated on alltrading workstations connected to the BSE trading computer inreal time


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Cont.. 30 stocks that represent SENSEX.(Updated on 7/7/2010) ACC Ltd. Bharat Heavy Electricals Ltd. Bharti Airtel Ltd.

Cipla Ltd. DLF Ltd. Jindal Steel & Power Ltd. HDFC HDFC Bank Ltd.

Hero Honda Motors Ltd. Hindalco Industries Ltd. Hindustan Unilever Ltd.


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Cont.. ICICI Bank Ltd. Infosys Technologies Ltd. ITC Ltd.

Jaiprakash Associates Ltd. Larsen & Toubro Limited Mahindra & Mahindra Ltd. Maruti Suzuki India Ltd. NTPC Ltd.

ONGC Ltd. Reliance Communications Limited Reliance Industries Ltd. Reliance Infrastructure Ltd. State Bank of India


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WHATS GOOD ABOUT INDEXES

Indexes provide useful information including: Trends and changes in investing patterns. Snapshots, even if they are out of focus. Yardstick for comparison.

KNOW IT A stock market index is a statistical indicator which gives an idea about how

the stock market is performing. In India the main indexes to be tracked are The BSE SENSEX and The NSE NIFTY.

The SENSEX comprises of 30 companies representing different sectors and thebroader NIFTY comprises of 50 companies from 24 sectors. There are manyother indexes that track particular sectors of the economy. These indexes would

give you an idea about how that particular sector is performing. INDEX both track US stock markets. NIKKEI 225 is the stock market index of

Japan, HANG SENG index for Hong Kong, FTSE 100 For UK, KOSPI for Korea,SHANGHAI for China etc. All these indexes serve the same purpose. It gives anidea about where the financial growth of a country is headed to.


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STOCK INDEX.

The stock index function as an indicator of the general economicscenario of a country / region / sector. If the stock market indices aregrowing, it indicates that the overall general economy of the country isstable and that the investors have faith in the growth story of theeconomy. If, however, there is a plunge in the stock market index over aperiod of time , it indicates that the economy of the country is introubled waters. Ita also an indication of what the corporates in thatcountry are facing.

A stock index is created by selecting a group of high performing stocks.

For example The FTSE 100 ( the stock index of London stockexchange) is constructed from the top 100 companies trading in theLondon stock exchange. If the FTSE 100 records a jump over a period oftime, it indicates that most of the top 100 companies in England aredoing well at that point of time and that the investors are positiveabout putting their money in England.


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Different Weighting Methods for Index

Construction

Aprice weighted index

The equal weighted index

Amarket capitalization

weightedAfloat adjusted market capitalization

The fundamental weighted


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A price weighted indexA price weighted indexis simply an arithmetic average

of the prices of the securities include in the index.

The divisor of a price weighted index is adjusted for

stock splits and changes in the composition of theindex when securities are added or removed, such thatthe index value is unaffected by such changes.

A major advantage for price weighted index is that its

computation is simple. Two major price weighted indexes are the Dow Jones

Industrial Average (DJIA) and the Nikkei Dow JonesStock Average.


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The equalweighted index The equal weighted indexis calculated as the

arithmetic average return of the index stocks and, for agiven time period, would be matched by the return ona portfolio that had equal currency amounts investedin each index stock.

As with the price weighted index, an advantage of anequal-weighted index is its simplicity.

Hence, each of the constituents of the index shouldhave equal amount of exposure from the portfolio.


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A market capitalizationweighted

index A market capitalization weighted indexhas weights

based on the market capitalization of each index stock,(current stock price times the number of shares

outstanding) as a proportion of the total marketcapitalization of all the stocks in the index.

This weighting method represents the changes in aggregateinvestors wealth more closely than price weighting. Sincethe weight of an index stock is based on its market

capitalization, a market capitalization weighted indexdoes not need to be adjusted when a stock splits or pays astock dividend.


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A float adjusted market

capitalization A float adjusted market capitalization weighted index is

constructed like a market capitalization weighted index.

The weights, however, are based on the proportionate valueof each firms shares that are available to investors to thetotal market value of the shares of the index stocks that areavailable to investors.

Hence, companies which have higher promoter holdings or

insider stake will have relatively less weight. The distinct advantage of this method is that the weight

represents the total market value in proportionate mannerwhich underlines the available float for the company.


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The fundamentalweighted The fundamental weighted method is where weights

are based on firms fundamentals, such as earnings,dividend, growth or cash flow.

In contrast to market capitalization index weights, theseweights are unaffected by the share price movement of theindex stocks.

The fundamental weighted method can be based on asingle fundamental factor or a combination of factors.

This method actually negates the biasness of the marketcapitalization method towards the share price performanceof the overvalued firms to the shares of the undervaluedfirms.


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NIFTY

The NSE S&P CNX Nifty 50 or the NIFTY as it iscommonly known is the prime index of the NationalStock exchange. The NIFTY index is made up of 50

different stocks from all the listed company at theNational stock exchange. The national stock exchangeis the largest stock exchange in India in terms oftrading volume and daily turnover. The 50 stocks thatmade up the NIFTY index are the prime stocks interms of market capitalization and daily tradingactivity. NIFTYis one of the two most significant stockindexes in India and the other one is the SENSEX.
http://www.sharetipsinfo.com/niftytrading.htmlhttp://www.sharetipsinfo.com/niftytrading.html


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Cont.. The NIFTY index at present is owned and managed by

the India Index Services and Products Ltd. (IISL). TheIndia Index Services and Products Ltd. (IISL) is joint

venture between the national stock exchange and theCRISIL. CRISIL is the first Indian company tospecialize for index management. The company has alicense agreement with the Standard & Poor's (S&P),which is the leading company in the world in Indexmanagement. The NIFTY index is used for purposeslike benchmarking fund portfolios, index basedderivative trading and managing index funds.


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Cont. The 50 stocks that are part of the NIFTY index are reviewed

and modified from time to time on the basis of the presentmarket condition and the position of respective companies.

On the basis of these factors and the present marketcapitalization of the companies prime companies fromdifferent sectors are selected for the NIFTY index. Atpresent the 50 companies in the NIFTY index represent asmuch as 21 different sectors. So it can be said that NIFTY

index has a good mix of different sectors and reflects theoverall market condition rightly. Moreover, with stocksfrom different sectors in the index it makes the NIFTYmore stable that is not greatly influenced by the fall incertain sector.


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Sensex

Bombay stock exchange or BSE is the largest stock exchange in India in termsof number of listed companies in the exchange and the market capitalizationof the listed companies

The prime index of the Bombay Stock Exchange is the BSE 30 that is popularlyknown as the Sensex. 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. Over the years of course these stocks have changed time and againaccording to the condition of the market and economy of the country.

The selection of the stocks is made on the basis of market capitalization andliquidity of stocks. The BSE index committee decides on which stock to includein the Sensex and which stock should be removed from the Sensex.

This committee is made up of highly placed experts and professionals from thefield finance and industry who are well aware of the Indian stock marketscenario.


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Cont

When selecting the stocks for constructing the Sensex there are somany factors that are considered to ensure that the Sensex portrays thecondition of the market and the overall economic scenario of thecountry.

But in the process it is also ensured that the Sensex is not completelydepend on a few companies or the sectors. The first thing that isimportant while selecting the stocks for including them in the Sensexis of course the market capital of the companies.

For this purpose only the reputed and well known large enterprises areconsidered. The companies that are included in Sensex have hugemarket capitalization. In Sensex there are companies like ACC,Reliance, and Wipro that are leaders in their respective sectors. Byincluding these prestigious companies it is ensured that the Sensexcatches the exact pulse of the industry.


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