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Demystifying Development and

Maneuvring of Indices of Stock Market in
India
P.Govindasamy1*, P.Mathuraswamy2, D.Anithakumari3, G.Manoj4

1* First and Corresponding Author, Associate Professor, School of Management Studies, Vel Tech Rangarajan
Dr.Sagunthala R & D Institute of Science and Technology (Deemed to be University), Chennai,
Email: [email protected]
2Assistant Professor in Management Studies, Guru Nanak College, Chennai, Email: [email protected]
3Associate Professor, Department of MBA, School of Management Studies and Commerce, Vels Institute of Science,
Technology and Advanced Studies (Deemed to be University), Chennai Email: [email protected]
4Assistant Professor, School of Management, Vel Tech Rangarajan Dr.Sagunthala R & D Institute of Science and
Technology (Deemed to be University), Chennai Email: [email protected]
*Corresponding Author

Received: 16.05.2022 Accepted: 19.07.2022 Published: 01.10.2022 DOI: 10.47750/QAS/23.190.16

Abstract

A plethora of information on indices of popular bourses across the globe has heisted investors off their mental
peace to give them nightmares. Operational nuances and informed interpretations of the movement in the stock
market indices of bourses operating at the international level, regional level, and national level and of those of
sector specific have always been a daunting task to myriad of investors actively functioning in the market arena.
This paper seeks to demystify the modus operandi of developing indices of bourses using pragmatic episodes and
thereby aid the investors in comprehending the subtleties associated with it and the niceties involved in its
dexterous maneuvering and making robust decisions for triumphant innings in the bourses. This paper provides
model of insights in computation of stock market indices with techniques such as market capitalization weighted
index, free-float weighted index, price weighted index, equal weighted index, impact cost, and index management.

Keywords: Indices of the bourses; Operational nuances; Pragmatic episodes; Dexterous maneuvering of indices.

risk-reward metric. In the parlance of stock market, it is

1. Introduction construed as a specific combination of securities acting as a
proxy of a portion or a market as a whole. Each index has its
The global business environment is the base for setting own unique way of calculation. Fama (1970), in his study
positive business climate in our country. India has been ranked “efficient capital markets” has concluded that deepening and
as one of the biggest stock market in the work according to strengthening the process of economic liberalization in the
Bloomberg data compiled by ETIG. Govindasamy (2019) the Asian developing countries is essential for minimizing the risks
degree of formality and level of financial planning across the and maximizing the benefits from increased international
firm help them to a position of the company. Both have been capital market integration. Generally the variations are
made possible only through the citizens who monitor the enunciated as a percentage to a value in the base period
progress and swiftly respond to the market positively. which may be previous day(s), last month(s), or last year(s).
Dzombak, Dan (2019) said as stock market is a measure of Stock Market indices gauge in terms of percentage the
stock market and Portfolio tailored to facsimile a specific variations in the price of shares, debentures, T-bills and other
bourse index is designated as an index fund. For instance, the securities over a period of time. Sharma et al. (2013), the study
30 large U.S. stocks contained in the Dow Jones Industrial implies that there exists opportunities for diversification of the
Average are weighted by their respective share prices. investors among the stock exchanges of BRICS. It was also
Referring to Govindasamy (2020) reiterates that it is to be observed that there are domestic factors (macroeconomic
remembered monitoring portfolio is a consistent on-going variables) that influence the stock markets. Sheu and Liao
process. Broby (2007) says there is no correct answers to the (2011), the empirical results demonstrated that the stock
question of how many stocks are optimal for inclusion in an markets of Brazil, Russia, and China have begun exerting
Index. Sankar Babu (2018) in his study says everyone is significant influences on the Dow Jones to some extent after
looking for a better solution and looking for the missing link. 2006, and the Dow Jones index continues to play a dominant
According to Cochrane (2005), index that includes assets role. An and Brown (2010), their findings indicated that there is
priced at par with its discounted pay-off are bound to reflect the some co-integration between the US and China, while there is
macroeconomic risks underpinning the assets’ value. Put- no co-integration between the US and the other emerging
together a tool which gauges the variations in the general markets by themselves. Gupta (2011), Indian markets showed
economic scenario is termed as an Index. Felix Goltz (2010) maximum variance. Kurtosis, as referred to as the volatility of
robust indices use sound and reliable inputs for enhancing the the volatility, measures the peakedness of the distribution.

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2. Materials And Methods hold so they book losses and quit stock market and tell others
about their loss stories.
In view of fund raising functions of business organizations
with varied mode that through share market has a sizable Poor service from Advisories and brokers: We are well
contribution which needs to urge people with varied set of skills aware about advisory scams, frauds and online cheating while
and qualifications, cultural, and family background. And all taking services from different advisory companies or so called
these are part of the system in the stock market. Many of the Face book pages, whatsapp services and telegram channels.
people are not aware Indian stock market intricacies of risk Due to their cheats and frauds, many people have to leave this
identifying, risk facing capability and concurring ROI are still in stock market. Sometimes brokers are also trap innocent
dilemma and more particularly in construction of the indices of investors to generate their brokerage. If you need a reliable
Indian Stock Market are most demanding skill among the advisory or researchers, I would advise you to go with Equities
Indian Investing Community and keeping this in mind and to Global Research. I have personally been taking their service
address this issue suitably we reviewing the stock market and can vouch for it. You can check out my previous answers
indices with simple models and analyze using two firm for more details.
examples with different dividends, earnings, and retained
earnings. The models focus the construction of indices with Lack of education in India: We are aware about our literacy
appropriate cases and its interpretations. Hope this article rate which is also a major reason why people are not investing
balance the mind set of all segments of professionals in stock market. We have farmers, labors, workers in major
especially the components of our economic system such as percentage who are totally unaware about investment in stock
peoples from agriculture and related areas. market. They just know only hard work. Countries like
Singapore, US, Canada, Japan have more percentages of
investors because they have educated and migrated people
which are skilled and talented. So these are primary reasons
2.1 Background of Research for lesser investments in stock market in India. But I can say
that it’s increasing day by day. Platforms like Quora also
If we calculate in terms of percentage who directly invest in playing a big role. Our stock market is stable and strong
stock market, it’s less than 1% of total population and if we compared to other world markets. Our economy is doing well.
calculate direct and indirect both, it may reach to 2 to 3% only. Government reforms are also helping stock market to remain
Indirectly means investments through Mutual funds, LICs and strong and bullish and this research helps to make aware
other similar investments available in India. Scenario of stock about stock market indices and it intricacies that will accelerate
market investments is changing day by day. Digitization is future percentages of investors in India.
helping people to grab knowledge about stock market. Let’s
take an example about Quora only. Quora was nowhere before
few years but popularity of Quora is increasing day by day and
people are interacting, grabbing knowledge and learning good 2.2 Research Objectives
things through Quora. This is just because of digitization
happening in India. Percentage of people is increasing who are To narrate a case with deliberations for computation of
investing in stock market directly or indirectly. Indirectly means market capitalization weighted index
thorough Mutual funds and other fund sources. Before 5 years, To narrate a case with deliberations for computation of
very few people are aware about mutual funds but nowadays free-float weighted index
investment in mutual funds increased rapidly. Still there is To narrate a case with deliberations for computation of
lesser people out of 130 crore population in India who invest in price weighted index
stock market. I am giving best possible reasons behind that: To narrate a case with deliberations for computation of
Fear of Loss: First and foremost thing which we hear from most equal weighted index
of the people is hear of loss. We heard about people’s loosing To narrate a case with deliberations for computations of
stories only and due to that most of the surrounding people try impact cost
to avoid investing in stock market. People invest in stock To identify the stock market index management
market without having proper knowledge, guidance or skill and
they lose their entire capital which leads them to make others
negative stating that stock market gives losses only. Lack of 3. Results
knowledge: In India, there are hardly 1% of people who
actually wants to study and learn about stock market. Others Basically market capitalization refers to the monetary
just want to gamble which leads them to losses only. Most of expression of the shares of a company held by the general
the traders start their journey with small capital and intraday public. It is computed by multiplying such shares by the price at
trading which is more or less suicidal only if you don’t have which it is traded in the market. For instance, if a hypothetical
sufficient knowledge. company has one lakh outstanding shares and is currently
being traded at Rs. 300 per share, then the market
Investments coming through major cities only: Everyone capitalization of the company would be Rs. 3 crores (i.e.
knows our 60% to 70% population is in villages and small 100000 x 300)
towns only who don't know anything about stock market and
others are judgmental who thinks that they are not qualified or
capable enough to understand this. So the major investments
in stock market coming through metros and other cities only. 3.1 The computation of market capitalization
index
Lack of patience and skill: Educated and qualified people
start investing in stock market but they don’t have sufficient It has been illustrated with a suitable case as discussed
skill or knowledge so they but some random stocks at very high below. We presume an index comprising of five stocks and a
point by listening through TV shows or reading newspaper base value of 200. We also take the starting period as 1-1-
which gives them initial losses and they don't have patience to 2020.

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Name of Stock Jan-1st 2020 Price Shares outstanding Today’sPrice of stock
of Stock (in Rs.) (Rs.)
ABC 300 40 lakhs 1,300
DFE 600 24 lakhs 900
GHI 900 32 lakhs 1,200
JKL 200 60 lakhs 700
MNO 500 16 lakhs 1,000
Table – A: Case-1 Market Capitalization weighted Index

Pric Total No. of Market Weight Value of Today’s Today’s Weight Value of
e as Shares Cap. As s as Portfolio as price Market as on Portfolio as
on outstanding on 1st on 1st on 1st Jan Cap today on today
Jan- in Lakhs Jan 2020 Jan 2020 (price (price x
1st (in Lakhs 2020 x weightage)
202 weightage)
0
300 40 12000 0.16 47.87 1300 52000 0.31 397.65
600 24 14400 0.19 114.89 900 21600 0.13 114.35
900 32 28800 0.38 344.68 1200 38400 0.23 271.06
200 60 12000 0.16 31.91 700 42000 0.25 172.94
500 16 8000 0.11 53.19 1000 16000 0.09 94.12
75200 1 592.55 170000 1 1050.12
Present Value of portfolio is(1050.12/592.55) * 100 = 177.22
Table – B: Case-1 Deliberations – Market Capitalizations Index

Interpretation 3.2 Free-float Market Weighted Index

Therefore the present index calculated as per the above Free float refers to the total outstanding shares minus
method is 177.22.It should be noted that India’s Sensex and Promoters and Government holdings. Free float market
Nifty were calculated as per this method. weighted index is calculated by multiplying free float market
capitalization with its weight. It should be noted that both BSE-
Sensex and NSE-Niftyhave switched to this method.

Name Stock Price Total No. Of Promoters’ and Outstanding Today’s

of as on Jan- Outstanding Governments Shares except price of
Stock 1st 2020 in Shares in Lakhs holdings shares Promoters’ and stock (Rs.)
Rs. in lakhs Government
ABC 300 40 8 32 lakhs 1300
DFE 600 24 6 18 lakhs 900
GHI 900 32 10 22 lakhs 1200
JKL 200 60 18 42 Lakhs 700
MNO 500 16 4 12 lakhs 1200
Table – C: Case-2 Free-Float Market Weighted Index

Price Total No. of Market Weigh Value of Today’s Today’s Weight Value of
as on Shares Cap. As ts as Portfolio price Market as on Portfolio
Jan- outstanding on 1st on 1st as on 1st Cap today as on
1st in Lakhs Jan Jan Jan 2020 today
2020 2020 (in 2020 (price x (price x
Lakhs weightage) weightage)
300 32 9600 0.18 52.75 1300 41600 0.33 430.57
600 18 10800 0.20 118.68 900 16200 0.13 116.08
900 22 19800 0.36 326.37 1200 26400 0.21 252.23
200 42 8400 0.15 30.77 700 29400 0.23 163.85
500 12 6000 0.11 54.95 1000 12000 0.10 95.54
54600 1 583.52 125600 1 1058.28
Free-Float M.Cap = No of Shares Outstanding except promoters and Govt. holdings * Market price per share
Present Value of portfolio is(1058.28/583.52) * 100 = 181.36
Table – D: Case-2 Deliberations - Free-Float Market Weighted Index

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exert significant influence on the index. This is illustrated
3.3 Price Weighted Index below:
This is the summation of the individual stock price adjusted
by its price weight. Those stock which command a higher price

Stock Name Stock Price Price Today's Today’s Today’s Price

Price Weights weighted Stock Price Price weighted
as on As on 1st Prices as on in Rs. Weights Prices
1st Jan Jan 2020 1stJan 2020
2020
ABC 300 0.12 36.00 1300 0.25 331.37
DFE 600 0.24 144.00 900 0.18 158.82
GHI 900 0.36 324.00 1200 0.24 282.35
JKL 200 0.08 16.00 700 0.14 96.08
MNO 500 0.20 100.00 1000 0.20 196.08
2500 1 620.00 5100 1 1064.71
Table – E: Case-1 Deliberations – Price Weighted Index
Present value in this case is (1064.71/620)*100 =171.73

3.4 Equal Weighted Index

Under this method all stocks are given equal weight age. It is nothing but the average of the prices of all stock considered for
this purpose. This is illustrated below:

Particulars Calculations Results

Index at Base level will be (300+600+900+200+500)/5 = 500 which is equated to 200 200
Index at current price level will be (1300+900+1200+700+1000)/5 = 1020 1020
Present value will be (1020/500)*100 = 204 204
Table – F: Case-1 Deliberations – Equal Weighted Index

3.5 Buy order and Sell order

This is illustrated below by laying out four buy order and four sell order of a stock.

Buy Order Sell Order

Sl. No. Quantity Rate Rate Quantum Sl. No.
of (Rs.) (Rs.) of
Shares Shares
1 1000 4 4.5 2000 5
2 1000 3.9 4.55 1000 6
3 2000 3.8 4.7 500 7
4 1000 3.7 4.75 100 8
Table – G; Case-1 Deliberations of Buy order and Sell Order

Interpretation 3.6 Impact Cost

Best buy rate is Rs.4, while that of sale is Rs.4.50. Price Here an ideal price, which is the average of the best buy
distinction is Rs.0.50, which is termed as “Bid-Ask Spread”. If and best sell offer, will be worked out. The acts of purchasing
an investor wants to procure 100 shares it would be effected at or selling are to be effected at this ideal price or very close to
the rate of Rs.4.50 On similar terms, if he wishes to sell 100 such price. The difference between the actual price and the
shares it would be affected at the rate of Rs.4.00. If an ideal price expressed as a percentage to ideal price is referred
investor procures and sells 100 shares simultaneously, he will to as impact cost. Following illustration dissects the
be losing Rs.50 (i.e. 100 * Bid-ask spread of Rs.0.50) on the computation of impact cost.
transaction. The market terms this loss as transaction cost.

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Buy Quantity Buy Price (in Rs.) Sell Price (in Rs.) Sell Quantity
1000 9.8 9.9 1000
2000 9.7 10 1500
3000 9.6 10.1 1000
Table – H: Case-1 Deliberations of Impact Cost

dilemma in construction of the indices of Indian stock market

Interpretation and keeping this in mind and to address this issue suitably we
reviewing the stock market indices with simple models and
In the above example, the ideal price is Rs. 9.85 (i.e. analyzing the construction of indices with appropriate cases
average of Rs.9.80 and 9.90). If 1000 shares are procured at, and its interpretations. Hope this article balance the mind set of
say, Rs. 9.90, the impact cost works out to Rs. 0.05 and which all segments of professionals especially the component of our
when expressed as a percentage to ideal price works out to economic system such as peoples from agriculture and related
0.51% (i.e. [0.05/9.85]* 100). It should be noted that impact areas. The continuous focus of this kind of research with multi
cost for procurement and sale facets will be different and will dimensions helps to growth of stock market operations
also fluctuate with the size of the transaction effected. eventually economic growth.

3.7 Managing Stock Market Index 5. Conclusion

This involves constructing an index, maintaining it and Thus the very purpose of stock market index is to furnish
revising it as when warranted. These are generally handled by information, in quantitative terms, on movement in share prices
agencies that specialize in them. The act of constructing an in a market, be it regional, local or global, to all market
index involves selecting the stocks to be included in the index participants and all stakeholders. It also indicates the overall
and resolving on the technique to be followed for calculating performance of the market or a specific segment of it. A
index. Maintaining an index implies acclimating the index by majority of the general public remains oblivion to the technical
incorporating the bonus issues and rights issues announced by operational nuances of the stock market and end up paying
the companies, stock split effected apart from mergers, high penalty for their inadequate knowledge. This paper
consolidation et al. Revising an index is concerned with enlightens the gullible investors on the operational subtleties of
replacing existing stocks with new stocks as warranted by the the bourses, namely the complex computations associated with
situation. the development and maneuvering of indices of the bourses
with the simple lucid models and computations on of market
capitalization weighted index, free-float weighted index, price
4. Discussion weighted index, equal weighted index and the review of
deliberations take the market indices insights practically.
According to Madhusudan (1998) found that BSE sensitivity
and national indices did not follow random walk by using
correlation analysis on monthly stock returns data over the
period January 1981 to December 1992. And As per the
6. Author Contributions
research concluded by Avijith Banerjee (1998), in his article “A Conceptualization and models preparation of research was
Glimpse of Portfolio Management” he mentioned that the done by first author, Second author was collecting the reviews
modern portfolio literature suggests 'beta' value Pas the most and arranging theoretical aspects, Third author working on
acceptable measure of risk of scrip. The securities having low excel and formatting. Overall supervision, formal analysis and
P should be selected for constructing a portfolio in order to communications managed by first author.
minimize the risks. The highlight of study was conducted by
Arun Jeth Malani (1999) “Risky Business, He was concluded
by commenting that risk is not measurable or quantiable. But
risk is calculated on the basis of historic volatility. Returns are 7. Conflicts Of Interest
proportional to the risks, and investments should be based on
the investors' ability to bear the risks, he advised. Nath and Declare conflicts of interest or state “The authors declare
Verma (2003) examine the interdependence of the three major no conflict of interest.” And “no role of the funders in the design
stock markets in south Asia stock market indices namely India of the study; in the collection, analyses or interpretation of data;
(NSE-Nifty) Taiwan (Taiex) and Singapore (STI) by employing in the writing of the manuscript, or in the decision to publish the
bivariate and multivariate co integration analysis. He found that results”
no co-integration was exists for the entire period (daily data
from January 1994 to November 2002). They concluded that
there is no long run equilibrium. Bhanu Pant and Dr. References
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