scrip selection criteria for an Index - Sensex/Nifty

Criteria for selecting stocks of a market index:

1.    Diversification.
2.    Market Capitalization
3.    Liquidity

Diversification: An index should represent the overall market. So the constituents are picked from different sectors. At the time of creating an index they consider the sectors which contributed to the growth of the economy. There would be no benefit if they include stocks of undeveloped sectors. Beyond a certain point adding more stocks would bring zero benefit. That’s why there are no aviation companies in Sensex. In recent years there has been a significant improvement in this sector. In future we can expect a representation from this sector; may not be addition to the existing 30 shares but as a replacement to other stock. We have seen this kind of replacement when DLF was added in place of Dr Reddy’s labs. So they select developed sectors and finalize the number of stocks in an index. This number doesn’t get changed most of the times. Read more

January 3, 2009 | Filed Under Stocks | Leave a Comment

Types of Stock market indexes - Sensex Nifty calculation

There are three different types of stock indexes.

Market capitalization weighted index
Price weighted index
Equally weighted index

Market capitalization based index is the famous one among the above and is used by most of the exchanges world wide. BSE Sensex and NSE NIFTY are calculated based on the method of market capitalization weight.

Market capitalization weighted index: In this method of calculation each company is given weight according to their market capitalization. So the higher the market capitalization of a constituent higher is its weight in the index.

For simplicity assume there are only 5 constituents in an index. A base value will be taken to calculate present value of the index. Usually this base value corresponds to prices of the constituent stocks on a particular historic date. For this example, say as at April 3rd 2000. I didn’t take April 1st because you may think I am fooling you Take the base value as 1000. Read more

January 3, 2009 | Filed Under Stocks | Leave a Comment

What is Stock market Index

A stock market index is constituted by a set of stocks in an equity market. It could be exchange specific or country or region specific or sector specific. It gives a relative picture of performance of a country/region. It’s not an absolute measure but serves as a most important thing for benchmarking and comparing. Mutual funds performance is measured against a predefined index. A stock market index number is a relative measure of the prices of a pre-defined group of stocks. It is a relative value because it is expressed relative to the weighted average of prices at some chosen starting date or base period. So all the constituents don’t necessarily go down when the value of an index goes down. But its movement shows the trend of the market i.e. bullish or bearish.

January 3, 2009 | Filed Under Stocks | Leave a Comment

What is the difference between recession and depression?

As we posted on recession previously, a recession is generally described as a significant decline (Negative growth rate) in country’s GDP (Gross domestic product) for at least two quarters or longer. Generally a recession is preceded by several quarters of slowing down in economic activity.

So what is depression? Depression is nothing but a recession, which lasts longer and its impact is deeper. If any downturn in the economy or GDP can be called as recession then more than 10 percent decline in GDP is called depression. If you look at the last century, we could observe many recessions but depressions are few. United States 1929 great depression was the largest and most important economic depression in modern history and is used in the 21st century as an example of how far the world’s economy can fall. The great depression which started on 29th October 1929 lasted till around 1939. Read more