1.2 STOCK FUTURE & STOCK INDEX FUTURE IN INDIA

What is an index?

It is a number which measures the change in a set of values,over a period of time.

An Index is used to give information about the price movements of products in the financial, commodities or any other markets.

STOCK INDEX

The change in value of a set of stocks which constitute the index.

Stock Index number is calculated taking the current relative value of a weighted average of the price of a pre-defined group of equities.

Stock Market is a place where the stocks of a listed company are traded. A single figure that sums up the overall performance of the market on a daily basis is the Stock Index.

STARTING VALUE /BASE OF THE INDEX IS A SET OF NUMBER 100 OR 1000. EXAMPLE: ON 3RD NOV’95-BASE VALUE

OF THE NIFTY WAS SET TO 1,000.

What is a good index?

It should represent the market. It should capture the behaviour of a

large variety of different portfolio in the market.

It should be well diversified & highly liquid.

It should be professionally maintained.

THE S & P CNX NIFTY

It is an market capitalization index based upon solid economic research.

It was design as a barometer of market movement,foundation of the new world of financial products based on the index like index futures,index options,index funds.

USES OF MARKET INDEX

As a Barometer for market index. As a Benchmark portfolio performance. An underlying in derivative instruments

like index futures. Passive fund management by index

funds.

ECONOMIC SIGNIFICANCE OF INDEX MOVEMENT

Reflect the changing expectations of the stock market about future dividens of the corporate sector.

Index goes up, if the stock market thinks that the prospective dividend in the future will be better than previous years.

BUT WHY STOCK PRICE MOVES??

NEWS ABOUT THE COMPANY NEWS ABOUT THE COUNTRY. Index purely capture the news about the

country & that can be done by averaging.

Each stock contains a mixture of two elements:

1. Stock news2. Index news

TYPES OF INDEXES

Broad-Market Index: This consists of all the large, liquid stocks of the country and becomes thebenchmark for the entire capital market of the country. An example for this is the S&P CNX 500.

Specialized Index: We can either have Industry or Sector specific Index for any particular sector of the economy which then serves as the Benchmark for that particular industry or we can have an index for the highly liquid stocks.

MARKET CAPITALISATION WEIGHTED INDEX CALCULATION

CURRENT MARKET

1,668,791.10 872,686.30 1,452,587.65 2,675,613.30 660,887.857,330,566.20

BASE MARKET CAPITALISATION

1,654,247.50 860,018.25 1,465,218.80 2,669,339.55 662,559.307,311,383.40

Conti..

Base Index = 1000 Current market capitalization Index = ---------------------------------x Base Value Base Market Capitalization

Index = 7330566.20 * 1000 7311383.40

So that work out to be 1002.60

Free float Mkt capitalization

Except the following include in free float1. Shares held by founders/directors/acquirers which has

control element

2. Shares held by persons/ bodies with "Controlling Interest"

3. Shares held by Government as promoter/acquirer

4. Holdings through the FDI Route

5. Strategic stakes by private corporate bodies/ individuals

6. Equity held by associate/group companies (cross-holdings)

7. Equity held by Employee Welfare Trusts

8. Locked-in shares and shares which would not be sold in the open market in normal course.

World index

1)Global: BBC Global 30 - world stock market index of

30 of the largest companies by stock market value in Europe, Asia and the Americas.

S&P Global 1200 - global stocks index covering 31 countries and around 70 percent of global market capitalization.

2)U.S Dow Jones Indexes - leading global index

provider. Dow Jones Industrial Average

Con’d

NASDAQ (National Association of Securities Dealers Automated Quotations)Composite - broad market index of all of the common stocks and similar securities traded on the NASDAQ stock market.

NYSE Composite - covers all common stocks listed on the New York Stock Exchange.

Russell Indexes - leading U.S. equity index family for institutional investors

Con’d

Hong Kong Hang Seng Indexes - record daily changes of

the largest companies of the Hong Kong stock market (represent about 67% of capitalization of the Hong Kong Stock Exchange).

Indonesia-JSX Composite. Japan-Nikkei 225Malaysia -FTSE Bursa

Malaysia Index New Zealand-NZX 50 Pakistan-KSE 100.

Europe-Dow Jones Euro Stoxx 50- FTSEurofirst Index Series

United Kingdom- FTSE 100 Index (Financial Times Stock Exchange Index)

India: BSE sensex 30,S & P CNX Nifty.