Types of Stock market indexes – Sensex Nifty calculation

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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.

 

 

 

 

S.No

Stock Name

Stock price as at
April 3rd 2000

No.of shares
in million

Stock price as at
 Jan 2nd 2009

1

ABC

150

20

800

2

DEF

300

12

450

3

GHI

450

16

420

4

JKL

70

30

500

5

MNO

270

8

820

 

Market capitalization = No.of Shares *  Market Price
Sum of the market capitalization of all constituent stocks as at April 3rd 2000 = (150*20 + 300*12 + 450*16 + 70*30 + 270 *8) = Rs 18,060 million.

Sum of the market capitalization of all constituent stocks as at January 2nd 2009 = (800*20 + 450*12 + 420*16 + 500*30 + 820 *8) = Rs 49,680 million.

Now the value of the index as per market cap weight = (49680*1000/18060) = 2750

So as the price of these constituent scrips change the index value changes.

If the exchange decides to replace an existing constituent with another stock then the sum of market value of constituent stocks get changed. So they adjust the base price to nullify that effect.

Price weighted index: In price weighted index method index value is calculated based on the price of constituent stock.

So the value of index by this method = (800 + 450 + 420 + 500 + 820) * 1000 / (150 + 300 + 450 + 70 + 270) = 1240 * 1000/2990 =  2411

Note: The methods described may not exactly match with the real time calculations.

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{ 5 comments… read them below or add one }

rohit ladia January 27, 2009 at 10:21 am

please see to your calculation ,they are wrong.

Reply

Satyam January 31, 2009 at 5:58 am

Thanks for pointing that out. The final figure was wrongly given. We have corrected it now. Would glad to see this type of comments.

Reply

Sha November 18, 2010 at 1:43 am

Hi,
Could i also be provided with the way of calculating the third type of index and its definition

*Equally Weighted Index

Thanks,
Sha

Reply

Sha November 18, 2010 at 1:45 am

Are other types apart from the three?

Thanks,
Sha

Reply

Suksyed April 25, 2012 at 2:43 pm

hello,

Which is good? Higher nifty or lesser nifty points for a trader

Reply

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