Scribd
Upload
22 views

Security Market Index

This document discusses different types of stock market indexes, including price-weighted indexes and market capitalization weighted indexes. It explains how index values are calculated using different weighting methods and factors like stock prices and number of outstanding shares. The key difference between price-weighted and market cap weighted indexes is how component stocks are assigned weights in determining the overall index value.

Uploaded by

itstrll21
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
22 views

Security Market Index

This document discusses different types of stock market indexes, including price-weighted indexes and market capitalization weighted indexes. It explains how index values are calculated using different weighting methods and factors like stock prices and number of outstanding shares. The key difference between price-weighted and market cap weighted indexes is how component stocks are assigned weights in determining the overall index value.

Uploaded by

itstrll21
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/ 5

UNIT II

SECURITY MARKET INDEX

A market index is a hypothetical portfolio of investment holdings which represents a segment


of the financial market..Investors follow different market indexes to
gauge market movements. The three most popular stock indexes for tracking the
performance of the U.S. market are the Dow Jones, S&P 500 and Nasdaq Composite.

An average is composed of equally weighted items. Within a stock index, each stock has a
relative weight based on the stock's total market value. While a stock's relative weight within
an index can change every day, a stock's weight within an average is always the same.
Index

A composite representing the value of a group of stocks.

An index is made up of similar stocks based on market capitalization,


industry or company size. Upon selection of stocks, the index value is
computed. Each stock will have a different price and price change in
one stock would not be proportionately equal to the price change in
another.

stock market index is a statistical measure which shows changes taking


place in the stock market. To create an index, a few similar kinds of
stocks are chosen from amongst the securities already listed on the
exchange and grouped together.
The criteria of stock selection could be the type of industry, market
capitalisation or the size of the company. The value of the stock market
index is computed using values of the underlying stocks. Any change
taking place in the underlying stock prices impact the overall value of the
index.
If the prices of most of the underlying securities rise, then the index will
rise and vice-versa.
In this way, a stock index reflects overall market sentiment and direction
of price movements of products in the financial, commodities or any other
markets.
Some of the notable indices in India are as follows:

a. Benchmark indices like NSE Nifty and BSE Sensex


b. Broad-based indices like Nifty 50 and BSE 100
c. Indices based on market capitalization like the BSE Smallcap and BSE
Midcap
d. Sectoral indices like Nifty FMCG Index and CNX IT.

Security Market Indexes. A security market index is a means to measure


the growth of value of a set of securities. Sometimes, an index is just an
arithmetic average, but, usually, it is a ratio where the current index
value is divided by the index value of some base year, the base market
value

The two most common kinds of indices are – Price-weighted


and market capitalization-weighted index.

There are approximately 5,000 U.S. indexes. The three most widely
followed indexes in the U.S. are the S&P 500, Dow Jones Industrial
Average, and Nasdaq Composite
The stock market index acts like a barometer which shows the overall
conditions of the market. They facilitate the investors in identifying the
general pattern of the market. Investors take the stock market as a
reference to decide about which stocks to go for investing.

An index is made up of similar stocks based on market capitalization,


industry or company size. Upon selection of stocks, the index value is
computed. Each stock will have a different price and price change in one
stock would not be proportionately equal to the price change in another.
So, the value of the index value cannot be arrived at as a simple sum of
the prices of all the stocks.
Here is when the importance of assigning weights to stocks comes into
play. Each stock in the index is assigned a particular weightage based on
its market capitalization or price. The weight represents the extent of the
impact that the stock’s price change has on the value of the index.

MARKET CAPITALIZATION: refers to the total market value of the stock


of a company. It is calculated by multiplying the total number of
outstanding stocks floated by the company with the share price of a
stock. It, therefore, considers both the price as well as the size of the
stock. In an index which uses market-cap weightage, the stocks are
assigned weightage based on their market capitalization as compared to
the total market capitalization of the index.
Suppose a stock has a market capitalization of Rs. 50,000 whereas the
underlying index has a total market-cap of Rs. 1,00,000. Thus, the
weightage given to the stock will be 50%.
It is important to note that market capitalization of a stock changes every
day with the fluctuation in its price. Due to this reason, weightage of the
stock would change daily. But usually such a change is marginal in
nature. Moreover, the companies with higher market-caps get more
importance in this method.
In India, free-float market capitalization is used by most of the indices.
Here, the total number of shares listed by a company is not used to
compute market capitalization. Instead, use only the amount of shares
available for trading publicly. Consequently, it gives a smaller number
than the market capitalization.
A capitalization-weighted (or "cap-weighted") index, also called a market-
value-weighted index is a stock market index whose components
are weighted according to the total market value of their outstanding
shares. Every day an individual stock's price changes and thereby
changes a stock index's value.

To find the value of a cap-weighted index, we can multiply each


component's market price by its total outstanding shares to arrive at the
total market value. The proportion of the stock's value to the overall
total market value of the index components provides the weighting of the
company in the index.

Market capitalization is the market price of a security time the number of


shares outstanding. To calculate the value of a value-weighted index, sum
the market capitalization for each company and divide it by a divisor
which is set initially to make the index a round number.

WEIGHT= MARKET CAPITALIZATION(COMPONENTS) X 100

TOTAL MARKET CAPITALIZTION

PRICE WEIGHTED AVERAGE: this method, the value of an index value is


computed based on the stock price of a company rather than the market
capitalization. Thus, the stocks which have higher prices receive greater
weightages in the index as compared to the stocks which have lower
prices. This method has been used in The Dow Jones Industrial Average in
the US and the Nikkei 225 in Japan

A price-weighted index is a stock index in which each company included in


the index makes up a fraction of the total index proportional to that
company's share stock price per share. In its simplest form, adding the
price of each stock in the index and dividing by the total number of
companies determines the index's value. A stock with a higher price will
be given more weight than a stock with a lower price and, therefore, will
have a greater influence on the index's performance.

To calculate the value of a simple price-weighted index, find the sum of


the share prices of the individual companies and divide by the number of
companies. In some averages, this divisor is adjusted in order to maintain
continuity in the event of stock splits or changes to the list of companies
included in the index.

Price-weighted indexes are useful because the index value will be equal to
(or at least proportionate to) the average stock price for the companies
included in the index. This allows the construction of indexes that will
track the average stock price performance of a specific sector or market.

PRICEINDEX=SUM OF ALL THE PRICES OF STOCKS WHICH ARE PART OF


THE INDEX / NUMBER OF STOCKS IN INDEX.

You might also like