STOCK MARKET INDICES PREVALENT IN INDIA

Stock Market is a place where the stocks of a listed company are traded. Stock market is a marketplace for share trading, incorporates of trade stocks and their derivatives. The term 'stock market' is actually an idea for the operation which makes trading of company stocks possible. A single figure that sums up the overall performance of the market on a daily basis is the Stock Index. A good Stock Index captures the movement of the well diversified and highly liquid stocks. For a lay man it is the pulse rate of the economy. Index movements reflect the changing expectations of the stock market about future dividends of the corporate sector. The index is calculated by finding the weighted average of the prices of the most actively traded companies in the market, where the weights are generally in proportion to the market capitalization of the company. Investing in the stock market is one way of generating the high returns on offer but for some people it is not the preferred method. If you're one of the people that do not want to follow continually changing shape prices for individual companies, indices stock may be the option for you. Investing in indices stock means you agree to accept the returns on offer based on the entire stock market rather than individual companies. For example, instead of investing in one particular company, you would invest in a broader classification of companies. Microsoft is a well known global company in the technology sector and it is a commonly held stock in portfolios around the world. If you wanted to invest in indices stock rather than in the stock market itself, you would choose indices which include Microsoft in it. Such as broad technology indices which might include over 100 companies. The returns you generate are then based on the performance of all the companies in that sector rather than Microsoft itself. This lowers the risk of investing in just one particular company which has the potential to perform poorly because of market conditions, investor preferences, or external circumstances which you are unable to predict. By investing in indices stock you lower your exposure to the inherent risks associated with individual companies and instead gain returns generated by a particular sector. Indices stock can also take the form of a broader stock market indices which is based on is based on the entire stock market. The returns are generally lower than those that could be achieved through an individual company but the risks are also lower.

Types of Indices available:Broad-Market Index: This consists of all the large, liquid stocks of the country and becomes the benchmark for the entire capital market of the country. An example for this is the S&P CNX 500. Specialized Index: We can either have Industry or Sector specific Index for any particular sector of the economy which then serves as the benchmark for that particular industry or we can have an Index for the highly liquid stocks. Taking an example for an industry specific index we have the S&P Banking Index which is a capitalization-weighted index of 26 domestic equities traded on

the New York Stock Exchange and NASDAQ, The stocks in the Index are high-capitalization stocks representing a sector of the S&P 500. Similarly, The S&P CNX Nifty is a relevant example for an index composed of highly liquid stocks

Stock Exchanges in india BSE and NSE

There are two national stock exchanges in the country, the Bombay Stock Exchange(BSE) and the National Stock Exchange (NSE) . BombayStockExchange(BSE) The BSE is the oldest stock exchange in the country, established in 1875. It was structured as a membership based firm, an Association of Persons. It is now a demutualised and corporatised entity, falling in line with Sebi's guidelines on demutualization of stock exchanges. The purpose is to separate ownership and management to prevent any conflicts of interest. The BSE is managed by a Board of Directors, comprising professionals, trading member representatives and has a managing director too. The Board formulates larger policy issues and exercises overall control. The managing director takes care of daily operations. The exchange is present in 417 cities in India. BSE Indices The BSE maintains several stock indices that are popular among investors. The following are some of the closely watched indices. BSE Sensitive Index (BSE-30) BSE National Index (BSE-100) or BSE 100 BSE-200 and the Dollex BSE-500 Apart from these, there are a host of other indices which focus on certain sections of stocks like small cap and mid-cap stocks. Then there are various other indices that are focused on sectors. These indices are updated on a real time basis in market hours. The most popular index is the BSE Sensitive Index, the Sensex

SENSEX Calculation Methodology

The Sensex has a very important function. The Sensex is supposed to be an indicator of the stocks in the BSE. It is supposed to show whether the stocks are generally going up, or generally going down. To show this accurately, the Sensex is calculated taking into consideration stock prices of 30 different BSE listed companies. It is calculated using the free-float market capitalization method. This is a world wide accepted method as one of the best methods for calculating a stock market index. Please note: The method used for calculating the Sensex and the 30 companies that are taken into consideration are changed from time to time. This is done to make the Sensex an accurate index and so that it represents the BSE stocks properly. To really understand how the Sensex is calculated, you simply need to understand what the term free-float market capitalization means. (As we said earlier, the Sensex is calculated on basis of the free-float market capitalization method) But, before we understand what free-float market capitalization means, you first need to understand what market capitalization means. Market cap or market capitalization is simply the worth of a company in terms of its shares! To put it in a simple way, if you were to buy all the shares of a particular company, what is the amount you would have to pay? That amount is called the market capitalization! Depending on the value of the market cap, the company will either be a mid-cap or large-cap or small-cap company!

FREE FLOAT CAPITALIZATION

Many different types of investors hold the shares of a company. The Govt. may hold some of the shares. Some of the shares may be held by the founders or directors of the company. Some of the shares may be held by the FDIs etc. etc! Now, only the open market shares that are free for trading by anyone, are called the free-float shares. When we are calculating the Sensex, we are interested in thesefreefloatshares. A particular company, may have certain shares in the open market and certain shares that are not available for trading in the open market. According the BSE, any shares that DO NOT fall under the following criteria, can be considered to be open market shares: Holdings by founders/directors/ acquirers which has control element

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Holdings by persons/ bodies with "controlling interest" Government holding as promoter/acquirer Holdings through the FDI Route Strategic stakes by private corporate bodies/ individuals Equity held by associate/group companies (cross-holdings) Equity held by employee welfare trusts Locked-in shares and shares which would not be sold in the open market in normal course.

A company has to submit a complete report about who has how many of the companys shares to the BSE. On the basis of this, the BSE will decide the freefloat factor of the company. The free-float factor is a very valuable number! If you multiply the "free-float factor" with the market cap of that company, you will get the free-float market cap which is the value of the shares of the company in the open market! A simple way to understand the free-float market cap would be, the total cost of buying all the shares in the open market! So, having understood what the free float market cap is, now what? How do you find out the value of the Sensex at a particular point? Well, its pretty simple. First: Find out the free-float market cap of all the 30 companies that make up the Sensex! Second: Add all the free-float market caps of all the 30 companies! Third: Make all this relative to the Sensex base. The value you get is the Sensex value! The third step probably confused you. To understand it, you will need to understand ratios and proportions from 5th standard mathematics. Think of it this way: Suppose, for a free-float market cap of Rs.100,000 Cr... the Sensex value is 4000 Then, for a free-float market cap of Rs.150,000 Cr... the Sensex value will be..

So, the Sensex value will be 6000 if the free-float market cap comes to Rs.150,000 Cr!Please Note: Every time one of the 30 companies has a stock split or a "bonus" etc. appropriate changes are made in the market cap calculations.Now, there is only one question left to be answered, which 30 companies, why those 30 companies, why no other companies? The 30 companies that make up the Sensex are selected and reviewed from time to time by an index committee. This index committee is made up of academicians, mutual fund managers, finance journalists, independent governing board members and other participants in the financial markets.

The major advantages of a Free-float Index

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A Free-float Index reflects the market movements better. It aids passive investment because a Free-float index is easily replicable It improves index flexibility and the resultant market coverage and sector coverage It avoids the undue influence of any closely-held large-capitalization stock on the index movement It is considered as a global best practice in index construction.

Sensex Calculation Methodology As per the methodology, the level of index at any point of time reflects the free-float market value of 30 component stocks relative to a base period. The market capitalisation of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalisation is further multiplied by the free-float factor to determine the free-float market capitalisation. The base period of Sensex is 1978-79, and the base value is 100 points. This is often indicated by the notation 1978-79=100. The

calculation of Sensex involves dividing the free-float market capitalisation of 30 companies in the index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the Sensex. It keeps the index comparable over time and is the adjustment point for all index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate the Sensex every 15 seconds and disseminated in real time. SENSEX is calculated using the "Free-float Market Capitalization" methodology, wherein, the level of index at any point of time reflects the free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization. The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of SENSEX involves dividing the freefloat market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX every 15 seconds. The value of SENSEX is disseminated in real time. Sailent features of the sensex BSE Sensitive Index (Sensex) Coverage : Originally, it comprised 30 companies from both the "specified" i.e., A group and the "non-specified" i.e., B1 & B2 groups. However, at present all the securities included in the Sensitive Index are specified group shares. These shares are selected on the basis of their liquidity, depth, and floating-stock-adjusted depth, as well as on the basis of industry representation.

Base year : The financial year 1978-79 was chosen as the base year. Considerations for the choice were the price stability during that year and proximity to the period of introduction of the index. One of the important aspects of maintaining continuity with the base year is to update the base year average. The base year value adjustment ensures that the rights issue and new capital of the index securities do not destroy the value of the index. On-line computation of the index : During market hours, the BSEs computers automatically use the prices of the index securities at which trades are executed to calculate the Sensex in a process of continuous updation.

Reconstitution of the BSE Sensitive index : Reconstitution is being carried out whenever required because some stocks might have lost their liquidity or investors may have found some new industry specific fancy. Base change calculation: The changes are in effect proportional adjustments in the base year average market value to offset price changes in market values upon which the index is based.

National Stock Exchange of India Limited (NSE) The NSE was set up in 1992 by leading financial institutions (IDBI, LIC, UTI, ICICI, SBI and others) and was the first one to offer screen based trading all over India. Though the impetus for its establishment came from policy makers in the country, it has been set up as a public limited company. NSE is different from most other stock exchanges in India where membership on an exchange also meant ownership of the exchange. At the NSE, the ownership and management of the exchange are completely separate. It is the largest stock exchange in India in terms of daily turnover and number of trades, for both equities and derivative trading. The NSE's key index is the S&P CNX Nifty, known as the Nifty, an index of fifty major stocks weighted by market capitalization. Markets Currently, NSE has the following major segments of the capital market:
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Equity Futures and Options Retail Debt Market Wholesale Debt Market Currency futures

Salient features of NSE Governing body A board of directors manages the exchange. The board delegates decisions relating to market operations to an executive committee, which includes representatives from the exchanges trading members, the public and the management. Besides, the exchange operates various committees to advise it on areas such as good market practices, settlement procedures, risk containment systems etc. Industry professionals, trading members and exchange staff man these committees. The day-to-day management of the exchange is delegated to the managing director who is supported by a team of professional staff.

Membership There are 789 members (as of Feb 28 07) who can trade on both the capital market and derivatives segments. There are 150 members who can trade only on the capital market segment. There are 47 members who can trade on the capital market, wholesale debt market (WDM) and derivatives segments. There are 9 members who can trade on WDM and capital market segments, and 7 who can trade only on WDM. In all, there are 1002 members. Number of listed companies On the capital market segment, 1,462 companies are available for trading. On the wholesale debt market segment, 3,216 securities are available for trading. Capital market operations data The turnover on the NSE has increased from Rs 1,805 crore in 1994-95 to Rs 15.69 lakh crore in 2005-06. The average daily traded volume has increased from Rs 17 crore during 1994-95 to Rs 6,253 crore during 2005-06. The total market capitalization has increased from Rs 363,350 crore as of end March 1995 to Rs 28.13 lakh crore as of end March 2006. Number of shares traded has increased from 0.007 billion in November 1994 to 8.57 billion in March'06. The average daily turnover in the derivatives segment was Rs 37,000 crore in Feb07. Classification of Listed Securities On NSE, securities for account period settlement are classified as EQ segment or Normal segment. For book entry i.e. rolling settlement, the securities are traded in two separate segments known as AE Segment and BE Segment. In case of AE segment, dematerialised securities are traded only in market lots, whereas in BE segment these can be traded in multiples of one share.

NSEIndices The popular indices of NSE are : S&P CNX NIFTY S&P CNX DEFTY S&P CNX 500

S&P CNX NIFTY JUNIOR CNX MIDCAP CNX Industry Indices CNX Segment Indices Method of Computation of Indices S&P CNX Nifty S&P CNX Nifty comprises 50 stocks and is a market capitalization weighted index. Stocks are selected based on their market capitalization and liquidity. An important criteria of S&P CNX Nifty is that the impact cost (cost of executing the entire set of S&P CNX Nifty securities) is low, making it an optimal index for derivatives trading. The S&P CNX Nifty represents about 58% the total market capitalization of the stocks listed on the Indian bourses as of Dec 29, 2006. The Impact cost (explained in latter part of the article) of S&P for a portfolio of Rs 5 million is 0.08 per cent. S&P CNX Defty Defty is a dollar denominated index based on the S&P CNX Nifty. Computations are done using the S&P CNX Nifty index calculated on the NEAT trading system of NSE and USD Rupee exchange rate that is based on the real time polled data feed CNX Nifty Junior CNX Nifty Junior comprises 50 stocks and is a market capitalization weighted Index. The next rung of liquid securities after the Nifty are included in the Junior Index. The Impact cost for CNX Junior Portfolio size of Rs 2.50 million is 0.14% per cent. The CNX Nifty Junior represents about 10% per cent of total market capitalization of all equity shares as on Sep 2906. S&P CNX 500 Equity Index The S&P CNX 500 Equity Index comprises 500 stocks and is market capitalization weighted. Stocks are selected based on their market capitalization, industry representation, trading interest and financial performance. However, the overriding need has been to ensure that the industry weightings in the index dynamically reflect the industry weightings in the market. The S&P CNX~500 Equity Index currently contains 72 industry groups (S&P CNX Industry Indices) representing over 90 per cent of total market capitalization and about 86% per cent of total turnover making it an optimal market benchmark. S&P CNX Industry Indices The S&P CNX industry indices serve as a standard for comparison of the stock market performance of individual companies vis-a-vis their respective peer groups and also enable fund managers to benchmark NAV performance vs. specific industries. CNX Mid Cap

CNX Midcap is computed using market capitalisation weighted method, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value. The constituents and the criteria for the selection judge the effectiveness of the index. Selection of the index set is based on the following criteria : All the stocks, which constitute more than 5% market capitalization of the universe (after sorting the securities in descending order of market capitalization), shall be excluded in order to reduce the skewness in the weightages of the stocks in the universe. After step (a), the weightages of the remaining stocks in the universe is determined again. After step (b), the cumulative weightage is calculated. After step (c) companies which form part of the cumulative percentage in ascending order unto first 75 per cent (i.e. upto to 74.99 per cent) of the revised universe shall be ignored. After, step (d), all the constituents of S&P CNX Nifty shall be ignored. From the universe of companies remaining after step (e) i.e. 75th percent and above, first 100 companies in terms of highest market capitalization, shall constitute the CNX Midcap Index subject to fulfillment of the criteria mentioned below. CNX Segment Indices The reform process in India has resulted in business restructuring and consolidation of the Indian corporate sector. With a view to providing investors with a better perspective of the stock market performance of the various segments of the Indian corporate sector, NSE has constructed various segment Indices such as the CNX MNC (Multinational Corporations) Index, CNX PSE (Public Sector Enterprises) Index and the CNX IBG (Indian Business Groups) Index. These indices aid investors in their asset allocation and segmental exposure decisions. CNX Customized Indices Customized indices can be used for tracking the performance of the clients portfolio of stocks vis-a-vis objectively defined benchmarks or for benchmarking funds NAV performance to customized indices. . Index Maintenance The Index Maintenance Sub-committee of NSE ensures that the guidelines for index maintenance are adhered to, for example: Monitoring and completing divisor adjustments in a timely manner on account of corporate

actions like share changes, stock splits, mergers/amalgamations, etc Monitoring and updating the indices database dynamically Index Review according to laid down criteria Adjustments for corporate actions are carried out in a timely manner to ensure that the value of the index is not affected by the corporate action, and remains comparable over a period of time. Each index has a replacement pool comprising companies that meet all criteria for candidacy to that index. All replacements of companies in the index take place from this pool. The replacement pool is monitored continuously and at all times includes only those companies that meet the selection criteria.

The India stock market is definitely the stock market of future. It presents opportunities to investors that simply do not exist in the U.S., in Europe or in any other western nation. Not only is the country safe and secure, despite the recent hotel bombings, the government supports people who are innovative and willing to take risks and from this environment a number of world beating companies have been borne. In recent times these companies have outperformed all others and this is evidenced when you look at their share price movement over the last five years. The Indians stock market when compared to the stock markets around the world is also quite different and represents a country that has only just begun to achieve the growth possible through a capitalist mindset. Capitalism requires individuals to take responsibility for their own growth and this allows people to take risks in order to generate reward. With greater rewards on offer, consumerism has taken hold which is both positive and negative for the country. It is positive in that it allows people to access the products and services they desire such as plasma TVs, cars and high end fashion but it is also negative as it has the potential to follow the U.S. example of consumerism which is now being strongly questioned by the world. The India stock market represents the future of global economic growth. India is a country that has lower labor costs than its counterparts and is able to offer businesses a regulatory environment which is cheap and easy. You can expect the India stock market to perform strongly in the coming years no matter how serious the global financial crisis becomes.