Gagan Essay

3712 Words Sep 3rd, 2013 15 Pages
SECURITY ANALYSIS AND POR TFOLIO MANAGEMENT

LESSON 16: STOCK MARKET INDICES
Stock market indices are the barometers of the stock market. They mirror the stock market behavior.With some 7,000 companies listed on the Bombay stock exchange, it is not possible to look at the prices of every stock to find out whether the market movement is upward or downward. The indices give a broad outline of the market movement and represent the market. Some of the stock market indices are BSE Sensex, BSE200, Dollex, NSE-50, CRISIL-500, Business Line 250 and RBI Indices of Ordinary Shares. Market Capitalisation (MC) = Number of shares × Prices of shares X = 100 × Rs. 20 = Rs. 2,000 Y = 200 × Rs. 30 = Rs. 6,000 Z = 250 × Rs. 40 = Rs. 10,000 Aggregate
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Indices help to recognise the broad trends in the market. 2. Index can be used as a bench mark for evaluating the investors portfolio. 3. Indices function as a status report on the general economy. Impacts of the various economic policies are reflect on the stock market. 4. The investor can use the indices to allocate funds rationally among stocks. To earn returns on par with the market returns, he can choose the stocks that reflect the market movement. 5. Index funds and futures are formulated with the help of the indices. Usually fund managers construct portfolios to emulate any one of the major stock market index. ICICI has floated ICICI index bonds. The return of the bond is linked with the index movement. 6. Technical analysts studying the hostorical performance of the indices predict the future movement of the stock market. The relationship between the individual stock and index predicts the individual share price movement.

Computation of Stock Index
A stock market index may either be a price index or a wealth index. The unweighted price index is a simple arithmetical average of share prices with a base date. This index gives an idea about the general price movement of the constituents that reflects the entire market. In a wealth index the prices are weighted by market capitalisation. In such an index, the base period values are adjusted for subsequent rights and bonus offers. This gives an idea about the real wealth created for

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