Scribd
Upload
31 views6 pages

Market Indexes

Uploaded by

Shiwani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
31 views6 pages

Market Indexes

Uploaded by

Shiwani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 6

Market Averages and Indexes

➢ Market index is an indicator that indicates the movement of secondary market


either it is going up or down and help to measure the level of market
➢ Market averages and indexes refers to way of measuring how the value of a
basket of selected stocks changes over time
➢ The market average is the sum of all the prices of representative sample of
stocks divided by the number of stocks in the sample
➢ Market index is a measure of changes in market capitalization of a
representative sample of stocks against a base date and value
➢ Stock market index give an insight into the overall trends of secondary market
(i.e. where is the market going and where the market were yesterday) and
sentiment towards a particular stock or set of stock
➢ It can be compared with barometer i.e. it measures the temperature of stock
market.
➢ Stock market index can use to determine systematic risk by showing
relationship between stock return & market return.

Construction of an index
• Following factors should be taken while constructing an index
1. Sample size
▪ DJIA has taken 30 blue chip stocks listed on NYSE
▪ BSE SENSEX made of top 30 stocks
▪ NSE Nifty made of top 50 stocks
▪ NEPSE index is composite index because it takes all stocks listed in NEPS
▪ S&P 500 index represents about 1/3 of the population of NYSE listed
stock
2. Representativeness
▪ Represent of small and large organization
▪ NEPSE sub index represents all 13 categories i.e. banking, development
bank , finance, life insurance, non life insurance, micro finance, mutual
fund, hotels and tourism, hydro power, manufacturing and production,
trading, investment and others .
▪ S&P 500 includes a representative sample of stocks of large and small,
new and old, profitable and un-profitable, NYSE listed and OTC, service
and manufacturing corporation
3. Weighting
▪ Price weighted (DJIA, Nikkei225)
▪ Value-weighted (S&P 500, NEPSE index, NYSE index)
▪ Equally weighted
4. Convenient units i.e. point basis.

Methods of calculating indexes


1. Price weighted index (PWI) :-

▪ Dow-Jones Industrial Average (DJIA) and Nikkei 225 is based on PWI.


▪ It is calculated by adding the closing prices of stocks that are included in the
index and divided by number of stocks included in the index.
▪ The divisor needs to be adjusted frequently with the stock dividends
distribution and announcement of stock splits and reverse stock splits in the
securities.
▪ PWIo= ∑Po / d
▪ PWIt = ∑Pt/ d
▪ %Δ index or ROI =(PWIt – PWI0)/ PWI0
Change in index (in point basis) = (PWIt – PWI0)
Where,
o P0 = closing price of stock at time t = 0
o ∑P0 = sum of the closing price of stock at time t = 0
o Pt = closing price of stock at time t = t
o ∑Pt = sumof closing price of stock at time ‘t’
o d = divisor (i.e. no of stock included in the index)
o t= today (or current)
o 0 =previous day

❖ PWI when stock dividend or stock split or reverse stock split


▪ PWI = ∑P*/ d*
Where;
o P* = closing price of stock after adjustment of stock dividend, stock split
and reverse stock split
o ∑P* = sum of closing price of stock after adjustment of stock dividend,
stock split and reverse stock split
o d* = new divisor or adjusted divisor
𝑠𝑢𝑚 𝑜𝑓 𝑛𝑒𝑤 𝑝𝑟𝑖𝑐𝑒𝑠
= (previous divisor) x ( 𝑠𝑢𝑚 𝑜𝑓 𝑜𝑙𝑑 𝑝𝑟𝑖𝑐𝑒𝑠 )
= d x (∑P*/ ∑P)
Notes
a. Price of stock after stock dividends (P*)
𝑃
P* = (1+%𝑆𝐷)
b. Number of stock after stock dividend (N*)
N* = N (1 + %SD)
c. Price of stock after stock split (P*)
𝐿.𝑁𝑜
P* = P x( )
𝐻.𝑁𝑜
d. Number of shares after stock split (N*)
𝐻.𝑁𝑜
N* = 𝑁 ( 𝐿.𝑁𝑜 )
Note: opposite formula for reverse stock split

Where;
o %SD = percentage of stock dividend (in fraction)
o N = number of stock before stock dividend, stock split and reverse stock
split
o L.No and H.No = light and heavy number

2. Value-weighted index (VWI) / Market-capitalization Weighting):-


▪ Stock market index based on market capitalization of the stocks making up
the index
▪ Market capitalization is the product of closing price of stocks and number
of outstanding shares
▪ It represents the change in total market value of stocks during the current
period as compare to base period or previous period
▪ VWI method is used by NEPSE index, S&P index, NYSE index, AMEX index,
SENSEX 30 (Bombay stock exchange), NIFTY 50 (national stock exchange,
India) and NASDAQ index

i. VWI based on base period market capitalization


VWIt = (∑MCt/ ∑MCB) x BV
ii. VWI based on previous days market capitalization
VWIt = (∑MCt/ ∑MC0) x VWI0
iii. Change in index (point basis)
= VWIt – VWI0
iv. Percentage change in index or return on index
= VWIt – VWI0/ VWI0
Note: Stock dividend, stock split or reverse stock split do not effect VWI
but adjustment in closing price and number of outstanding shares is
required

Where;
o B, t and 0 = base period, current period or today and previous day
o MC = market capitalization or market value
= P0 x N
o ∑MCB = base periods or years total market capitalization
= ∑(PB x NB)
o ∑MC0 = previous days total sum of market capitalization
= ∑(P0 x N0)
o ∑MCt = current or today’s total market capitalization
= ∑(Pt x Nt)
o Bv = base value (i.e.100 or 10…. And so on)
o VWI0 and VWIt = previous days and today’s value weighted index
o P0, PB and Pt = previous days, base period and today’s closing price of
stock
o N0, NB and Nt = previous days, based period and today’s number of
outstanding shares
3. Equally weighted index (EWI) or un-weighted index :-
▪ EWI carries equal weights to all stocks regardless of their price or market
value
▪ Such index can be used by individual who randomly select stock for their
portfolio and invest the equal amount in each stock
▪ It is calculated by arithmetic and geometric mean of the percentage
changes in the value for the stocks in the index
i. EWI based on arithmetic mean
EWIt = [∑PRt/n] x BV (or EWI0)
ii. EWI based on geometric mean
EWIt= {(PRA) x (PRB) x …. x (PRn)}1/n x (BV or EWI0)
iii. Return on index or percentage change in index
= EWIt –EWI0/ EWI0
Where;
o PR= price relative of stock
= P1/P0
o ∑PR = total sum of price relative
= P1(A)/P0(A) + P1(B)/P0(B) + …. + P1(n)/ P0(n)
= PR(A) + PR(B) + …. + PR(n)
o n = number of stock included in the index
o EWI0 and EWIt = equally weighted index for time period 0 and
time period (t)

You might also like