Chapter 1 Market index Simply index refers to an indicator which is used to show the change in variables between two

distinct time periods. Index may be price index, inflation index etc. But now we are being concerning about market index. Market index as an indicator is used to show the moment of market or security market between two periods of tells about the bullish or bearish trend of market i.e. whether the market is going up or down. Objectives of calculating index For the assessment or evaluation of investment as well as market. To make appropriate decision. For planning and forecasting. To analyze the impact of economic and other indicator. To make research.

Main concerns of index computation Sample size Representatives Weighting (price weighting, value weighting, equally weighting) Expression unit

Price weighted index Under this index the average price of security, which are included in sample size is taken to show the change in security market. The higher fluctuation in price range of individual stock will mislead the index. Where, Price index (PI) =

Example:

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Day 0 Stock A B C

No 10 20 30

Price(Rs) 300 200 100

Day 1 No 10 20 30

Price(Rs) 330 200 95

Day 2 No 20 20 30

Price(Rs) 170 240 105

Day 3 No 20 22 30

Price(Rs) 110 210 115

Other information At the end of day 1 company A declares 2 for 1 stock. At the end of day 2 company B declares 10% stock dividend. Required: Calculate the PI for day 0. Index for day 0 (I0) = PWI for day 1. Index for day 1 (I1) = Change in index = = = = = = Here index has increased to 211.67 from 200. = =

c. By considering the stock split of day 1 revised the divisor and find the index for day 2. Price index for day one (I1) =

The new divisor used until the next change. Index for day 2 (I2) = =

.. Index has increased to 231.98 from 211.67 .. Return on index = % change = d. Find the price index for day 3. By considering the effect of stock dividend. =

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Index for day 2 (I2) =

New index for day 3 (I3) = .. Index has increased to 242.24 form 231.98. .. Return on index = % change = = Summary Price Divisor Index Return Stock split I1 = 600 3 200 635 3 211.67 5.93% 515 2.22 231.98 9.596% 515 2.126 242.24 4.423%

.22
Stock dividend I2 = 231.98 = New divisor = 2.126 Value weighted index (VWI) Under this index the overall value of securities (which are included in sample size) between two distinct period is taken to show the change in market. Since it uses the overall capitalization of market it is also known as capitalization method. NEPSE and S & P 500 index are calculated on the value weighted index. Where, Value weighted index (It) =

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Where, MV = Market value N = Number P = Price t = t-period b = base period I = index For example Day 0 Stock A B C No 10 20 30 Price(Rs) 300 200 100 Day 1 No 10 20 30 Price(Rs) 330 200 95 Day 2 No 20 20 30 Price(Rs) 170 240 105 Day 3 No 20 22 30 Price(Rs) 110 210 115

Other information At the end of day 1 company A declares 2 for 1 stock. At the end of day 2 company B declares 10% stock dividend. At the end of day 3 company C list additional 10 shares. SUMMARY TABLE MVt = N*P Index MVo = 10,000 100 MV1 = 10,350 MV2 = 11,350 103.5 113.5 MV3 = 11,870 118.70

Return,

3.5%

9.66%

4.58%

Value weighted index for t period (It) = =

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Where, MV Market value P Price N Number t t- period b base period I index a. Value weighted index for day 0 (I0) = 100 (assume) b. Value weighted index for day 1 (I1) = .. Index has increased to 103.5 for 100. .. Return in index = c. value weighted index for day 2

.. Index has increased to 118.70 from 113.5 .. Return on index By considering the additional listing of company C, raise the base value for index computation.

OR

Form day 4 onward, The revised base value is used i.e.

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Equally weighted index Under this method the relative change in price of securities (which are included in sample size) is taken to show the change in market between two distinct periods by assuming equal rupee investment is made in each assets. For example: Consider the following price Stock No Po N1 P1 N2 P2 10 300 10 330 20 170 A 20 200 20 210 20 240 B 30 100 30 95 30 105 C Additional information: At the end of day 1 there is share split of 2 for 1 on company A Equally weighted index for t-period (It) = = Equally weighted index for day 0 (I0) = 100 (assume) Equally weighted index for day 1 (I1) = = 103.33 .. Index has increased from 100 to 103.33 .. Return on index = % change = Equally weighted index for day 2 (I2) = = =

= = 112.78

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