![CALCULATION OF NIFTY
Example :- Say NIFTY comprises only 2 stocks – ‘A’ and ‘B’
Assume A has 1000 shares. Promoters hold 200 and rest 800 are available for active trading and hence are
free floating. B has 2000 shares, its promoters hold 1000 shares and rest 1000 are free-floating.
Say price of A is Rs. 10 and that of B is Rs. 20.
Solution :
A’s total market capitalisation [ 1000* Rs. 10 ] = Rs. 10000
A’s Free Float Market Cap [ 800 * Rs. 10 ] = Rs. 8000
Similarly, B’s total market capitalisation [ 2000 * Rs. 20] = Rs. 40000
B’s Free Float Market Cap [ 1000 * Rs. 20] = Rs. 20000](https://image.slidesharecdn.com/whatisindexandhowitiscalculated-190202153319-190202171513/85/What-is-index-and-how-it-is-calculated-190202153319-21-320.jpg)
What is index and how it is calculated 190202153319
- 1. Presented by : Priyanka Kumari Mansih Tiwari
- 2. Introduction Stock Exchange stock market index Criteria for selecting stocks to calculate index Why do we need indices? Understanding sensex Calculation of sensex Understanding nifty Calculation of nifty Conclusion
- 3. Stock exchange A stock exchange can be defined as :- Centralised market for buying and selling of stocks where the price is determined through supply – demand mechanism . The ministry of finance , the security exchange board of India ( SEBI ) and the Reserve Bank of India (RBI) are three regulatory authorities governing Indian capital market. SEBI is the apex body governing the Indian stock exchanges.
- 4. In stock exchanges continuous trading in securities takes place and trade occurs at different prices, as a result even on a single day prices of securities may fluctuate . On any trading day four prices can easily be identififed , namely opening price , closing price , the highest price of the day and lowest price of the day . The prices can move in a cyclical increasing and decreasing fashion
- 5. WHAT ARE STOCK INDICES From among the stocks listed on the exchange, some similar stocks are selected are grouped together to form an index. This classification may be on the basis of the industry the companies belong to, the size of the company, market capitalisation or some other basis. For example : The BSE Sensex is an index consisting of 30 stocks, similarly, the NSE Sensex is an index consisting of 50 stocks.
- 6. WHY DO WE NEED INDICES
- 7. A Stock Market Index is a method of measuring a section of the stock market. They are the barometers of the stock market. They mirror the stock market behaviour. With some 7000 companies listed on BSE, it is not possible to look at the prices of every stock to find out whether the market movement is upward or downward. The indices give a broad outline of the market movement and represent the market. Some of the stock market indices are : Sensex, NIFTY. An index is basically an indicator which gives us a general idea about stocks going up or down.
- 8. A stock market indices is created by selecting a group of stocks that are capable of representing the whole market or a specified sector or segment of the market. Any change in the price of the stocks leads to a change in the index value There is usually a provision for giving proper weights to different stocks on the basis of their importance in the economy. A stock market index act as the indicator of the performance of the economy or a sector of the economy.
- 9. LISTING HISTORY : the company should have a listing history on bse for atleast one year. MARKET CAPITALIZATION : company should be one among 100 market capitalisation of bse and each company should have a more than 0.5% of total capitalisation of bse index. FREQUENCY OF TRADING : the company stocks should be traded on each and every trading day for last one year. INDUSTRIAL REPRESENTATION : company should be a leader in the industry it represents
- 10. Free Float Market Capitalization (method adopted to calculate now) Weighted Average Market Capitalization (old method) Some other methods Full market capitalization method Modified capitalization method Equal weighing
- 11. Calculate the total free float market capitalization of the at any point of time . This is a simple sum of the free float market capitalization of the stocks that are part of Sensex. Check the base value of the index. This is the total market cap in the index when it was formed initially. Sensex was formed in 1986 , yet its base year is 1978-1979 . Divide the total free – float market capitalization with the base market capitalization value and multiply by the base index value. Incase of sensex the base index is 100. Steps to calculate index
- 13. Free float Market Capitalization First we need to understand what is Market Capitalization It is defined as proportion of total shares issued by the company that are readily available for trading in the market . In india mostly free float market capitalization method is used & is also used by two famous NSE &BSE. It generally excludes the promoters holding , government holding etc. In simple free float market capitalization is the total proportion of total shares available for trading to general public. These shares are called the free float shares and are available for trading by anyone.
- 14. Market Capitalization is the aggregate valuation of company based on its current share price and total number of outstanding shares . Example :- if a company has 1000 outstanding share and current market price of each share is Rs 10 =>Market capitalization = Number of outstanding share * Current share price =>1000 *10 = 10000 Stocks of companies are of 3 types :- Stock with market cap Rs 10000 crore or more ==Large cap stocks Stocks with market cap Rs 2 crore to 10 crore ==Mid cap stocks Stock with less than 2 crore market cap ==Small cap stocks
- 15. Company XYZ Ltd 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 Rs 10. According to question :- 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
- 16. Here total market capitalisation of the company is 1000 * Rs10 = Rs 10000 & Free float market capitalisation of the company is 300* Rs10 = Rs 3000
- 17. What is sensex? Full form : Senstivity Index : represents the strength of the market Sensex is primarily an index reflecting the Bombay Stock Exchange (BSE) . The sensex comprises of 30 prominent stocks derived from all key sectors which are traded actively in the exchange . Thus , the sensex truely reflects the movement of Indian stock markets . The base year used here for calculation is 1978-1979. Base value is 100.
- 18. 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 Stocks Open Stocks Market Issued Stocks Market Capitalization X 500 100 50000 Y 1000 50 50000 Sum of free float market cap of company X and company Y is 50000+50000 = Rs100000 Assume market cap during 1978-79 is 25000 Now Apply formula; 100000*100/25000 = 400
- 19. The term Nifty originated from two words “National” and “Fifty” . Nifty is a major stock index introduced by the National Stock Exchange. Nifty consists of 50 heavyweight stocks belong to various sectors, that are actively traded on the NSE . India Index Services and Products Ltd. (IISL) does the management of the Nifty 50 index
- 20. The Nifty is a market capitalization weighted index based on this Free Float Method. 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) * Index value in 1995 / market cap value in 1995.
- 21. CALCULATION OF NIFTY Example :- Say NIFTY comprises only 2 stocks – ‘A’ and ‘B’ Assume A has 1000 shares. Promoters hold 200 and rest 800 are available for active trading and hence are free floating. B has 2000 shares, its promoters hold 1000 shares and rest 1000 are free-floating. Say price of A is Rs. 10 and that of B is Rs. 20. Solution : A’s total market capitalisation [ 1000* Rs. 10 ] = Rs. 10000 A’s Free Float Market Cap [ 800 * Rs. 10 ] = Rs. 8000 Similarly, B’s total market capitalisation [ 2000 * Rs. 20] = Rs. 40000 B’s Free Float Market Cap [ 1000 * Rs. 20] = Rs. 20000
- 22. Therefore, total free float market capitalisation of A and B = Rs. (8000 +20000) = Rs. 28000 Index Value NIFTY = (Sum of free flow market cap of 50 major stocks of NSE) * Index value in 1995 / market cap value in 1995 Assume Market capitalisation during 1995 was Rs. 5000 Then NIFTY = 28000 *1000 / 5000 = 5600.
- 23. On the basis of the index i.e SENSEX for BSE and NIFTY for NSE, investors decide what to buy and where to invest their money by following the rising and falling trends of the market indices. So, if anyone is planning on investing their money in stock market, the SENSEX and NIFTY would be the new best friends. Because without the knowledge of index the investment would not be the fruitful one. CONCLUSION