Rights Issue – Example

Assume company XYZ has announced rights issue in the ratio of 5:2 (for every 5 shares additional 2 shares are offered). If you hold 100 shares of XYZ then you will be entitled to get 40 (100 * 2/5) new shares of XYZ. The new shares are usually given at deep discount price so that the full issue gets subscribed and the company may raise the required capital. A future date is fixed for this corporate action.

After this corporate action the share price comes down proportionate to the issue ratio, theoretically. Actual value differs from this theoretical value based on the intention of the funds’ raise.

Consider share price of XYZ is Rs 300 and the company is offering new shares at Rs 200 and you hold 100 shares of XYZ.

You can buy 40 shares at Rs 200. The amount required to buy new shares Rs 8000.
Value of the existing shares 300 * 100 = Rs 30,000
Total value of 140 shares = 30,000 + 8000 = Rs 38,000
Theoretical share price ex-rights = 38,000 / 140 = Rs 271.5 Read more

July 25, 2009 | Filed Under Stocks | 1 Comment

Actual Sensex Calculation – Free float Market Capitalization

We have already discussed different types of stock market indices. Market capitalization is the most common method across the world. The market capitalization method we covered is ‘Full Market Capitalization method’. But in reality, in most of the markets, Full Market Capitalization is not used for calculating market index values. At any time only a part of the total market capitalization is readily available for trading in the market. This is because promoters’ holding, government holding, strategic holding and other locked-in shares will not be available in the market for trading in the normal course.

A company provides the holdings information to the exchanges periodically. The exchanges calculate free-float factor as follows

(No. of shares readily available for trading in the market) / (Total number of shares outstanding) Read more

January 17, 2009 | Filed Under Stocks | Leave a Comment

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 | 2 Comments

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