“ On today’s Share Trading better improvement seemed. Mumbai Stock Exchange Index
( SENSEX) raised 146.08 points and ended in 16,575 ; In between Trading swinged to a maximum of 17,322, and a lowest to 16,552. Like that National Stock Exchange (NIFTY) raised 60 points and ended in 5250.30 ” Similar news can be heard or read in Television news or in Newspapers.
How it rises and lowers ? Similar to the price hike/ lower of Tomato, Onion ! If the price of stocks traded in stock market rises Market Rises. If it lowers market also lowers. This Up/Down is indicated by some indices in the stock market.
If those indices were continuously rising the Market is in Bull phase, if lowering were in Bear phase. Indexes predicts the Markets Trend, and the past Traveled path. Due to varied Social, Political, Physical, changes in different periods how the level had taken risen / lowered can be researched and broaden their mind (any individual) even may also be Utilized to their best.
For example, In 1929, The greatest financial crisis ( known as “ The Great Depression” ) in America, In 1990, the problems faced by Japan which led to the changes in their Stock exchanges, In 2008, January – 22 , the sudden downfall of the Indian Stock Market etc.., From all the above examples mistakes committed by forefathers, known studies, attained results, everything can be felt by Index.
In the midst of May – 2003, the Sensex being at 3,000 points had a Steep rise as 12,000 points in the midst of same May – 2006. History never felt such an Unsurprising Tremendous growth. More than 300 percent growth in three years. 110 Years Traditional America’s Dow Jones Industrial Average (DJIA – 1) has been beaten by our Stock Exchange. Not mere Chase. DJIA has taken 103 years to cross 10,000 points. But our SENSEX has taken only 20 years.
Sensex after crossing 12,500 points in some days a never before Historical Downfall happened. Large number of small investors lost nearly 40 – 60 % of their Investment. In 2006, May – 22, Trading commencing within an hour, sensex lost 1,111 points, in continuation both the stock exchanges were closed temporarily for an hour.
Upto the midst of 1980 with no Index, and only based upon the stock prices trading continued. Based on the stock prices the Overall market is either going Up or Falling down can’t be identified, a great difficulty was felt by many people. This urged a Question, why it can’t be converted as an Index? Those are scientifically calculated and invented. The Worlds Largest Organization “ BLOOMBERG ” creates and maintains Indexes.
SENSEX, first compiled in 1986, was calculated on a 'Market Capitalization-Weighted' methodology of 30 component stocks representing Large, well-established and financially sound companies across key sectors.
The base year of SENSEX was taken as 1978-79. SENSEX today is widely reported in both domestic and international markets through print as well as electronic media. It is scientifically designed and is based on globally accepted construction and review methodology.
Since September 1, 2003, SENSEX is being calculated on a free-float market capitalization methodology. The 'free-float market capitalization-weighted' methodology is a widely followed index construction methodology on which majority of global equity indices are based; all major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the free-float methodology.
The growth of the equity market in India has been phenomenal in the present decade. Right from early nineties, the stock market witnessed heightened activity in terms of various bull and bear runs. In the late nineties, the Indian market witnessed a huge frenzy in the 'TMT' sectors. More recently, real estate caught the fancy of the investors.
SENSEX has captured all these happenings in the most judicious manner. One can identify the booms and busts of the Indian equity market through SENSEX. As the oldest index in the country, it provides the time series data over a fairly long period of time (from 1979 onwards). Small wonder, the SENSEX has become one of the most prominent brands in the country.
In 1986,January – 2, with 549 points as Index number BSE started its journey. Even though designed in 1986 its base started at 100 points in 1979. Those two numbers (100, 549 ) can be discussed in detail.
Basic 100 points designated in a certain period is alone not important. How they were designed is also important ! Let us take 10 imaginary companies to explain its importance,
Year - 1
|
Company
|
Total no: of Shares
|
Share Price
|
Market Value
|
1
|
100
|
100
|
10,000
|
2
|
100
|
20
|
2,000
|
3
|
100
|
25
|
2,500
|
4
|
100
|
15
|
1,500
|
5
|
100
|
70
|
7,000
|
6
|
100
|
40
|
4,000
|
7
|
100
|
80
|
8,000
|
8
|
100
|
65
|
6,500
|
9
|
100
|
45
|
4,500
|
10
|
100
|
35
|
3,500
|
Total
|
49,500
|
Above tabulated 10 Companies shows its Market Capitalization as 49,500. It can also be Determined as Index number 100. After 5 years the same companies with stock price and market value can be assumed as follows,
Year – 5
|
Company
|
Total no: of Shares
|
Share Price
|
Market Value
|
1
|
100
|
125
|
12,500
|
2
|
100
|
25
|
2,500
|
3
|
100
|
29
|
2,900
|
4
|
100
|
19
|
1,900
|
5
|
100
|
78
|
7,800
|
6
|
100
|
45
|
4,500
|
7
|
100
|
84
|
8,400
|
8
|
100
|
70
|
7,000
|
9
|
100
|
50
|
5,000
|
10
|
100
|
42
|
4,200
|
Total
|
56,700
|
The Total market Capitalization is 56,700. Then what may have been happened to the Index. Let us see,
Market value 49,500 index = 100
Market value 56,700 index = ( 100 / 49500 ) x 56,700 = 114.54
In 5 years index has rised from 100 to 114.54. Simply saying Rs.100 invested in those 10 companies may have rised to Rs. 114.54.
In 1979 considering 100 points as a base, in 1986 how 549 points was designed can be understood from the following example. We have taken 10 companies as an example. But actually in BSE SENSEX, 30 companies Stocks are participating is the only difference.
How those 30 Companies are selected for involvement in the Stock Market ?
# Frequent Movements
# Average trading in a Day
# Large market capitalization are considered as important. Moreover
# Honest Administration,
# Investors complaints cleared were also considered.
Various sectored Organizations are given importance and added.
Now a doubt may arise here ! Those 30 companies formed in 1986 are still continuing. Not certainly. A better performing Organization named “A” say Rs. 3,000 market value may be included, by removing Company – 4 of market value 1,900 to maintain the Existing Index value to cope up for a Rapid Growth.
Year – 5
|
Company
|
Total no: of Shares
|
Share Price
|
Market Value
|
1
|
100
|
125
|
12,500
|
2
|
100
|
25
|
2,500
|
3
|
100
|
29
|
2,900
|
4
|
100
|
30
|
3,000
|
5
|
100
|
78
|
7,800
|
6
|
100
|
45
|
4,500
|
7
|
100
|
84
|
8,400
|
8
|
100
|
70
|
7,000
|
9
|
100
|
50
|
5,000
|
10
|
100
|
42
|
4,200
|
Total
|
57,800
|
Instead of Company – 4 , entering of “A” the 10 companies market value changes to 57,800. But the index must be balanced as 114.54. Hereafter while calculating index the year 5 market value 57,800 with 114.54 as its Base value, and further calculated for the forthcoming years.
Year – 9
|
Company
|
Total no: of Shares
|
Share Price
|
Market Value
|
1
|
100
|
155
|
15,500
|
2
|
100
|
35
|
3,500
|
3
|
100
|
39
|
3,900
|
4
|
100
|
40
|
4,000
|
5
|
100
|
88
|
8,800
|
6
|
100
|
55
|
5,500
|
7
|
100
|
94
|
9,400
|
8
|
100
|
78
|
7,800
|
9
|
100
|
57
|
5,700
|
10
|
100
|
49
|
4,900
|
Total
|
69,000
|
Market value 57,800 index = 114.54
Market value 69,000 index = ( 114.54 / 57800 ) x 69,000 = 136.73
Here a doubt may arise ! For the above calculated 9 years all those stock prices may be rising. Definitely no. Some may rise or few may continuously get lowering all are possible in stock market.
SENSEX CALCUATION :-
SENSEX is calculated using the 'Free-float Market Capitalization' methodology, wherein, the level of index at any point of time reflects the free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.
The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of SENSEX involves dividing the free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX on a continuous basis.
STOCKS SELECTION CRITERIA :-
The general guidelines for selection of constituents in SENSEX are as follows:
Equities of companies listed on Bombay Stock Exchange Ltd. (excluding companies classified in Z group, listed mutual funds, scrips suspended on the last day of the month prior to review date, scrips objected by the Surveillance department of the Exchange and those that are traded under permitted category) shall be considered eligible.
Listing History: The scrip should have a listing history of at least three months at BSE. An exception may be granted to one month, if the average free-float market capitalization of a newly listed company ranks in the top 10 of all companies listed at BSE. In the event that a company is listed on account of a merger / demerger / amalgamation, a minimum listing history is not required.
The scrip should have been traded on each and every trading day in the last three months at BSE. Exceptions can be made for extreme reasons like scrip suspension etc.
Companies that have reported revenue in the latest four quarters from its core activity are considered eligible.
From the list of constituents selected through Steps 1-4, the top 75 companies based on free-float market capitalisation (avg. 3 months) are selected as well as any additional companies that are in the top 75 based on full market capitalization (avg. 3 months).
The filtered list of constituents selected through Step 5 (which can be greater than 75 companies) is then ranked on absolute turnover (avg. 3 months).
Any company in the filtered, sorted list created in Step 6 that has Cumulative Turnover of & > 98%, are excluded, so long as the remaining list has more than 30 scrips.
The filtered list calculated in Step 7 is then sorted by free
float market capitalization. Any company having a weight within this filtered
constituent list of <0 .50=".50" be="be" excluded.="excluded." font="font" shall="shall">
All remaining companies will be sorted on sector and sub-sorted in the descending order of rank on free-float market capitalization.
Industry/Sector Representation: Scrip selection will generally attempt to maintain index sectoral weights that are broadly in-line with the overall market.
Track Record: In the opinion of the BSE Index Committee, all companies included within the SENSEX should have an acceptable track record.
FREE FLOAT METHODOLOGY :-
Free-float methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in the index. Free-float market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market. It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a free-float index is reduced to the extent of its readily available shares in the market.
Subsequently all BSE indices with the exception of BSE-PSU index have adopted the free-float methodology.
DEFINITION OF FREE FLOAT :-
Shareholding of investors that would not, in the normal course come into the open market for trading are treated as 'Controlling/ Strategic Holdings' and hence not included in free-float. Specifically, the following categories of holding are generally excluded from the definition of Free-float:
· Shares held by founders/directors/ acquirers which has control element
· Shares held by persons/ bodies with 'Controlling Interest'
· Shares held by Government as promoter/acquirer
· Holdings through the FDI Route
· Strategic stakes by private corporate bodies/ individuals
· Equity held by associate/group companies (cross-holdings)
· Equity held by Employee Welfare Trusts
· Locked-in shares and shares which would not be sold in the open market in normal course.
After designing of Sensex in 1986, the participation of Organizations are,
Names of the Companies Inclusion
for INDEX in 1986
|
Sl.No
|
Name of the company stock
|
1
|
A.C.C
|
2
|
Reliance
Industries
|
3
|
Indian
Tobacco Company (I.T.C )
|
4
|
Hindusthan
Lever ( HLL )
|
5
|
Tata
Motors ( Telco )
|
6
|
Tata
Steel ( Tisco )
|
7
|
Hindalco
|
8
|
Grasim
Industries
|
9
|
Larsen
& Toubro ( L&T )
|
10
|
Tata
Power
|
11
|
Bombay Pharma
|
12
|
Asian
Cables
|
13
|
Crompton
Greaves
|
14
|
Scindia
|
15
|
Zenith
Ltd
|
16
|
Ballarpur
Industries
|
17
|
Bombay Dyeing
|
18
|
Ceat
Tyres
|
19
|
Century
Textiles
|
20
|
G.S.F.C.
|
21
|
Hindusthan
Motors
|
22
|
Indian
Organic
|
23
|
Indian
Rayon
|
24
|
Kirloskar
Cummins
|
25
|
Mukund
Iron
|
26
|
Siemens
|
27
|
Indian
Hotels
|
28
|
Mahindra
& Mahindra (M & M)
|
29
|
Glaxo
Smithklime
|
30
|
Nestle India
|
At Present Inclusion for INDEX in
17.02.2012
|
Sl.No
|
Name of the company stock
|
1
|
|
2
|
|
3
|
|
4
|
|
5
|
|
6
|
|
7
|
|
8
|
|
9
|
|
10
|
|
11
|
|
12
|
|
13
|
|
14
|
|
15
|
|
16
|
|
17
|
|
18
|
|
19
|
|
20
|
|
21
|
|
22
|
|
23
|
|
24
|
|
25
|
|
26
|
|
27
|
|
28
|
|
29
|
|
30
|
|
| |
Here free float Adjustment factor is said as stocks belonging to the Entire promoters which are not taken for our calculation and subtracting those stocks from the Total no: of Shares.
Weight of Stocks = free float market Capitalization of a stock Combined Free float Market of all the 30 (or) 50 stocks.
From the above tabular columns we have seen how the Index number has been calculated, Involvement of the names of companies, market value with the datas. Let us see the milestones of journey taken by the index number upto till date.
1000, July 25, 1990
On July 25, 1990, the Sensex touched the magical four-digit figure for the first time and closed at 1,001 in the wake of a good monsoon and excellent corporate results.
2000, January 15, 1992
On January 15, 1992, the Sensex crossed the 2,000-mark and closed at 2,020 followed by the liberal economic policy initiatives undertaken by the then finance minister and current Prime Minister Dr Manmohan Singh
3000, February 29, 1992
On February 29, 1992, the Sensex surged past the 3000 mark in the wake of the market-friendly Budget announced by the then Finance Minister, Dr Manmohan Singh.
4000, March 30, 1992
On March 30, 1992, the Sensex crossed the 4,000-mark and closed at 4,091 on the expectations of a liberal export-import policy. It was then that the Harshad Mehta scam hit the markets and Sensex witnessed unabated selling.
5000, October 8, 1999
On October 8, 1999, the Sensex crossed the 5,000-mark as the BJP-led coalition won the majority in the 13th Lok Sabha election.
6000, February 11, 2000
On February 11, 2000, the infotech boom helped the Sensex to cross the 6,000-mark and hit and all time high of 6,006.
7000, June 20, 2005
On June 20, 2005, the news of the settlement between the Ambani brothers boosted investor sentiments and the scrips of Reliance Energy Reliance Capital and IPCL made huge gains. This helped the Sensex crossed 7,000 points for the first time.
8000, September 8, 2005
On September 8, 2005, the Bombay Stock Exchange's benchmark 30-share index -- the Sensex -- crossed the 8000 level following brisk buying by foreign and domestic funds in early trading.
9000, November 28, 2005
The Sensex on November 28, 2005 crossed the magical figure of 9000 to touch 9000.32 points during mid-session at the Bombay Stock Exchange on the back of frantic buying spree by foreign institutional investors and well supported by local operators as well as retail investors.
10,000, February 6, 2006
The Sensex on February 6, 2006 touched 10,003 points during mid-session. The Sensex finally closed above the 10K-mark on February 7, 2006.
11,000, March 21, 2006
The Sensex on March 21, 2006 crossed the magical figure of 11,000 and touched a life-time peak of 11,001 points during mid-session at the Bombay Stock Exchange for the first time. However, it was on March 27, 2006 that the Sensex first closed at over 11,000 points.
12,000, April 20, 2006
The Sensex on April 20, 2006 crossed the 12,000-mark and closed at a peak of 12,040 points for the first time.
13,000, October 30, 2006
The Sensex on October 30, 2006 crossed the magical figure of 13,000 and closed at 13,024.26 points, up 117.45 points or 0.9%. It took 135 days for the Sensex to move from 12,000 to 13,000 and 123 days to move from 12,500 to 13,000.
14,000, December 5, 2006
The Sensex on December 5, 2006 crossed the 14,000-mark to touch 14,028 points. It took 36 days for the Sensex to move from 13,000 to the 14,000 mark.
15,000, July 6, 2007
The Sensex on July 6, 2007 crossed the magical figure of 15,000 to touch 15,005 points in afternoon trade. It took seven months for the Sensex to move from 14,000 to 15,000 points.
16,000, September 19, 2007
The Sensex scaled yet another milestone during early morning trade on September 19, 2007. Within minutes after trading began, the Sensex crossed 16,000, rising by 450 points from the previous close. The 30-share Bombay Stock Exchange's sensitive index took 53 days to reach 16,000 from 15,000. Nifty also touched a new high at 4659, up 113 points.
The Sensex finally ended with its biggest-ever single day gain of 654 points at 16,323. The NSE Nifty gained 186 points to close at 4,732.
17,000, September 26, 2007
The Sensex scaled yet another height during early morning trade on September 26, 2007. Within minutes after trading began, the Sensex crossed the 17,000-mark . Some profit taking towards the end, saw the index slip into red to 16,887 - down 187 points from the day's high. The Sensex ended with a gain of 22 points at 16,921.
18,000, October 09, 2007
The BSE Sensex crossed the 18,000-mark on October 09, 2007. It took just 8 days to cross 18,000 points from the 17,000 mark. The index zoomed to a new all-time intra-day high of 18,327. It finally gained 789 points to close at an all-time high of 18,280. The market set several new records including the biggest single day gain of 789 points at close, as well as the largest intra-day gains of 993 points in absolute term backed by frenzied buying after the news of the UPA and Left meeting on October 22 put an end to the worries of an impending election.
19,000, October 15, 2007
The Sensex crossed the 19,000-mark backed by revival of funds-based buying in blue chip stocks in metal, capital goods and refinery sectors. The index gained the last 1,000 points in just four trading days. The index touched a fresh all-time intra-day high of 19,096, and finally ended with a smart gain of 640 points at 19,059.The Nifty gained 242 points to close at 5,670.
20,000, December 11, 2007
The Sensex actually crossed the 20,000-mark on October 29, 2007 during intra-day trading but closed at 19,977.67 points. However, it was on December 11, 2007 that it finally closed at a figure above 20,000 points on the back of aggressive buying by funds. The 30-share index spurted 360.21 points to fly-past the crucial level and closed at 20,290.89. The NSE Nifty closed at a record high of 6,097.25 points, up 136.65.
21,000, January 8, 2008
The Sensex crossed the 21,000-mark in intra-day trade on January 8, 2008, bringing cheer to the markets at the very beginning of the New Year.
Scaling a new peak, the Sensex spurted 264.88 points to touch 21,077.53 points in the first five minutes of trade.
Similarly, the wide-base National Stock Exchange's Nifty also hit 6327.65 points, up 48.55 points, as most of the index related shares traded higher.
During the years 1992 ,2005, 2006 we can see the Tremendous changes in the market either Up / Downfall which can be termed as abnormal. But in latest times we can reasonably say that due to the following factors:-
Splendid Performance of the Organizations
Seasonal rains
Lowest interest rate
World Economic growth
Based on the above reasons the growth of index seemed to be prudent.
About Index:-
‡ For around 15 seconds “SENSEX” is being calculated.
‡ Ups and Downs in the Market are reflected in the Index.
‡ If a rapid rise is seemed, sudden downfall may also be waiting.
‡ Likewise after a long term Downfall a pleasant growth can also be expected.
‡ Taking a particular Trend and period can never be expected Always.
‡ Stock market may Rise / Lower. If purchased while lowering ( Bear phase) stock market may show no sympathy.
‡ Apart from short term investment long term investment may definitely Gift to whom invested.
‡ While calculating SENSEX the concerned Organizations total number of stocks are not involved ( Total market capitalization )
‡ Floating ( Free – Float market capitalization )stocks market value is taken into account.
‡ The stocks pertaining to Promoters, Directors, Administrators, say nearly 75 % may hold no Transactions probably. Except those 75 % balance 25 % are called Floating stocks, which are considered, for calculation.
‡ Bombay Stock Exchange Sensitive index (BSE) short form is called “SENSEX” an inclusion of 30 Organizations.
‡ National stock Exchange (NSE) National Index Fifty short form is called “NIFTY” an inclusion of 50 Organizations.
‡ Sensex closing value is not the calculation of the Last minute closing value. Instead the last half-an-hours, total Average value is calculated as Sensex.
MAJOR ADVANTAGES OF FREE FLOAT METHODOLOGY :-
· A Free-float index reflects the market trends more rationally as it takes into consideration only those shares that are available for trading in the market.
· Free-float Methodology makes the index more broad-based by reducing the concentration of top few companies in Index.
· A Free-float index aids both active and passive investing styles. It aids active managers by enabling them to benchmark their fund returns vis-� -vis an investible index. This enables an apple-to-apple comparison thereby facilitating better evaluation of performance of active managers. Being a perfectly replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive managers as it enables them to track the index with the least tracking error.
· Free-float Methodology improves index flexibility in terms of including any stock from the universe of listed stocks. This improves market coverage and sector coverage of the index. For example, under a Full-market capitalization methodology, companies with large market capitalization and low free-float cannot generally be included in the Index because they tend to distort the index by having an undue influence on the index movement. However, under the Free-float Methodology, since only the free-float market capitalization of each company is considered for index calculation, it becomes possible to include such closely-held companies in the index while at the same time preventing their undue influence on the index movement.
· Globally, the Free-float Methodology of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same. MSCI, a leading global index provider, shifted all its indices to the Free-float Methodology in 2002. The MSCI India Standard Index, which is followed by Foreign Institutional Investors (FIIs) to track Indian equities, is also based on the Free-float Methodology. NASDAQ-100, the underlying index to the famous Exchange Traded Fund (ETF) - QQQ is based on the Free-float Methodology.
