Security Market Indicators

Chapter 4 Security Market Indicators

Stock market index is an indicator of stock market movement. Utility of stock market indices:

 Helps to analyze the movement of prices of various stocks with respect to market movement.  Helps to analyze the performance of portfolios.  Industry wise calculation helps to know the trends of the industries in the economy

Types of stock market indices Price Weighted Index – Weights based on prices of stocks in the index. Equal Weighted Index – Equal weights to all the index stocks Value ( Market Capitalisation Weighted ) Index – Weights based on Market Capitalisation of Index constituent stocks.

STOCK MARKET INDICES Name of

INITIAL

Company PRICE

FINAL PRICE

No. of SHARES

(lakhs)

INITIAL VALUE OF

FINAL VALUE OF

PRICE

OUTSTANDING

OUTSTANDING

RELATIVE

STOCK

STOCK

A

RS.25

RS.30

40

RS.1000 L

RS.1200 L

120

B

RS.500

RS.600

1

RS.500 L

RS. 600 L

120

RS.525

RS.630

RS.1500L

RS.1800 L

240

PRICE WEIGHTED INDEX = RS.630 / RS.525 x 100 = 120 VALUE WEIGHTED INDEX = 1800 / 1500 x 100 = 120 EQUAL WEIGHTED INDEX = 240 / 200 x 100 = 120

Leading Stock Market Indices in India Sensex : It is a value weighted index composed of 30 stocks .The index is calculated based on a free-float capitalization method; Nifty : The S&P CNX Nifty, a value weighted index of 50 companies representing around 21 sectors of the economy

Super Indices 1)Dow Jones- Industrial average, is a price – weighted average of 30 companies from various sectors in USA; 2) NASDAQ – Composite is based on market capitalization of stocks listed on NASDAQ stock market. 3) S&P 500 – is a market capitalization-weighted index of 500 stocks that measures the performance of economy in a broader sense. 4) FTSE 100— It constitutes 100 largest companies by market capitalization listed on London Stock Exchange. 5) Nikkei 225— It comprises top 225 companies listed on Tokyo Stock Exchange. 6) Hang Sang – It is a free float capitalization – weighted Index of companies listed on Hong Kong Stock Exchange. 7) Straits Times – It comprises top 30 listed companies on Singapore Exchange based on full market capitalization. 8) Dax- It is free float index of 30 companies listed on Frankfurt Stock Exchange. 9) Bovespa – It is an index of most liquid stocks listed on Sao Paulo Stock Exchange in Brazil. 10) Kospi – IT represents all common shares listed on Korean Stock Exchange

Limitations of Indices

1) Issue of warrants or CDs affect the market prices immediately. 2) The coverage is different for all indices. So each index may give partial picture of market movement. 3) Conversion of loans into equity by the financial institution promotes sudden increase in the market capitalization and thus the weights of these companies in the index.