Introduction
 Stock market indices are the barometers of the stock
market. They mirror the stock market behavior. 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, BSE-200, CRISIL-500
Usefulness of indices
 Indices help to recognise the broad trends in the
market.
 Index can be used as a bench mark for evaluating the
investors portfolio.
 Indices function as a status report on the general
economy. Impact of various economic policies are
reflected on stock market.
 The investor can use the indices to allocate funds
rationally among stocks. To earn returns on par with
the market returns, he can choose the stocks that
reflect the market movement.
 Technical analysis studying the historical performance
of the indices predict the future movement of the
stock market. Te relationship between the individual
stock and index predicts the individual share price
movement.
Computation of stock index
 A stock market index may either be a price index or a
wealth index. The unweighted price index is a simple
arithmetic average of share prices with a base date. The
index gives an idea about the general price movement
of the constituents that reflects the entire market. The
following example gives the calculation procedure for
the wealth index.
 Let us take an example of an index constructed with
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three scrips X Y Z.
Equity of company X: 100 (par value Rs 10)
Equity of company Y: 200 (par value Rs 10)
Equity of company Z: 250 (par value Rs 10)
Market price of scrip X: Rs 20
Market price of scrip Y: Rs 30
Market price of scrip Z: Rs 40
 Market capitalization (MC) = No. of shares x price of
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shares
X= 100 x 20 = 2000
Y= 200 x 30 = 6000
Z= 250 x 40 = 10000
Aggregate market capitalisation = 18000
Index at period N=100
 Market price at N + 1 period
 Market price of scrip X: Rs 25
 Market price of scrip Y: Rs 40
 Market price of scrip Z: Rs 50
 Market capitalisation:
 X= 100 x 25 = 2500
 Y= 200 x 40 = 8000
 Z= 250 x 50 = 12500
 Aggregate market capitalisation = 23000
 Index at N + 1 period = 23000 x 100/18000 = 127.78
 The calculation of index in India is based on free float
methodology.
Difference between the indices
 The indices are different from each other to a certain
extent. Some times the Sensex may move up by 100
points but NSE nifty may move only 40 points. The
main factors that differentiate one index from other
are given below.
(I) No. of component stock
(II) The composition of stocks
(III) The weights
(IV) Base year
The BSE SENSITIVE index
 The BSE SENSITIVE index has been long known as
the barometer of the daily temperature of Indian
bourses. In 1978-79 stock market contained only
private sector companies and they were mostly
geared to commodity production. Hence a sample 30
was drawn from them. With the passage of time
more and more companies private as well as public
came into the market. Even though the no. of scrips
in the Sensex basket remained the same 30,
representatives were given to new industrial sectors
such as services telecom, auto sector etc.
 The continuity and integrity of index are kept intact,
so that a comparison of the current market conditions
with those of decade ago is made easy and any
distortion in the market analysis is avoided. The
quantitative and qualitative criteria adopted in the
selection of 30 scrips are listed.
(I) Industry representation
(II) Track record
 Quantitative criteria
(III) Market capitalisation
(IV) Liquidity
 Industry representation: the company’s scrip should
reflect the present state of the industry and its future
prospects. Companies should be representative of
industry
 Track record: the company should have acceptable
track record of good performance in terms of
corporate governance and dividend payment. The
company should have listing history of at least one
year on BSE.
 Market capitalisation: the scrip should be among
top 100 companies listed by full market capitalisation.
The weight of each Sensex scrip based on free float
should be at least 0.5% of the index. Market
capitalisation should be average for last six months.
 Liquidity: the liquidity is based on trading frequency,
average daily trades and average daily turnover. The
scrip should have been traded on each and every
trading day for the last one year except for the extreme
reasons like scrip suspension.