A stock market index is a number that indicates the relative level of prices or value of securities in a market on a particular day compared with a base-day figure, which is usually 100 or 1000. There are many different ways of constructing an index. One of the most common methods is illustrated by the following simple example.The values of a market portfolio at the close of trading on Day 1 and Day 2 are recorded below: | |Value of portfolio |Index | |DAY1 |Tk 20,000 |1000 | |(base day) | | | |Day 2 |Tk 30,000 |1500 | We take Day 1 as the base day. The index on that day will be taken as a standard.The value assigned to the base day index is 1000 in this example.
On Day 2 the value of the portfolio has changed from Tk 20,000 to Tk 30,000, a 50% increase. Therefore, the value of the index on Day 2 will change to indicate a corresponding 50% increase in market value. The computation follows the procedure below: Day 2’s portfolio value Day 2’s index = ————————— * Base Day’s index Base Day’s portfolio value Tk 30,000 = ———– * 1000 Tk 20,000 =1500Day 2’s index is 1500 as compared to the 1000 of day 1. The above illustration only serves as an introduction to how a particular index is constructed. The daily computation of an index is more involved especially when there are changes in market capitalization of constituent stocks, e. g. , rights offers, stock dividend etc.
The primary objective of constructing market indices is to measure the performance of the market. The indices provide vital information about the current and historical behavior of the market.Index Calculation Algorithm (according to IOSCO Index Methodology): Yesterday’s Closing Index X Current M. Cap Current Index = ————————————————————– Opening M. Cap Yesterday’s Closing Index X Closing M. Cap Closing Index = ————————————————————– Opening M. Cap Current M.
Cap = ? ( LTP X Total no. of indexed shares ) Closing M. Cap = ? ( CP X Total no. of indexed shares ) Abbreviations and Acronyms M.Cap – Market Capitalization DSE – Dhaka Stock Exchange IOSCO – International Organization of Securities Exchange Commissions (IOSCO) LTP – Last Traded Price CP – Closing Price DSE Share Price Index: |Sl. No |Index Name |Base Index |Remarks | |1 |DSI (all shares) |350 (as on 01-11-1993) | | |2 |DGEN |817. 3704 (as on 24-11-2001) |SEC directive regarding index was on | | |(A, B, G ; N) | |17-11-2001 | |3 |DS20 |1000 (as on 01-01-2001) | | DSE introduced the DSE-20 index from January 1, 2001 comprising the blue-chip shares with a base index of 1000 as on January 1, 2000.
Since then, the index has been revised on two occasions, once in 2002 and later in 2004.The companies which are placed under the index currently are Square Pharmaceuticals, Islami Bank Bangladesh, Prime Bank, British American Tobacco, Beximco Pharmaceuticals, Southeast Bank, Dhaka Bank, National Bank, Square Textiles, Bata Shoe, BOC Bangladesh, Singer Bangladesh, ACI Ltd, Uttara Finance, Meghna Cement, Bangladesh Lamps, AMCL (Pran), Monno Ceramic, Apex Tannery and GQ Ball Pen. Apart from DSE-20, the prime bourse of the country has two other indices namely DSE general index or DGEN and all share price index or DSI.The benchmark index-DGEN- excludes companies of Z-category and is calculated on the basis of price movement of individual stocks. On the other hand, DSI includes all securities and is calculated on the basis of price movement of individual stocks. DSE-25, the revised index of the blue-chip shares of Dhaka Stock Exchange (DSE) was launched on trial basis on July 19 2010. DSE-25 reflected the price movement of the top companies in a more accurate way.
The DSE-25 included new companies from IT, insurance and service sectors for the first time since the inception of DSE-20 from January 2001.Meanwhile, DSE had also completed sector-wise index comprising 16 sectors. The sectors are bank, investment, fuel ; power, food, engineering, cement, insurance, IT, jute, paper ; printing, ceramic, tannery, pharmaceutical, textile, service ; real estate and miscellaneous. The new criteria of DSE-25 index are earning per share, minimum market capitalisation worth Tk 200 million, retaining minimum 30 per cent shares in public hand, minimum payment of 10 per cent dividend for the last three consecutive years and 95 per cent trading days in the last six months.Good corporate governance, regular holding of annual general meetings and sectoral representation are the other key qualifications for becoming eligible for inclusion in the index. CSE share price index: A good market representative index should involve: • Scientific calculation formulas with clear adjustment procedure • Logical scrip selection criteria • Distinct base date • Meaningful base value The only index the CSE has been maintaining since 10th October 1995 is a ALL SHARE PRICE INDEX using Chained Paasche method.It faces question of clarity.
This index was subject to unusual ups and downs and without a distinct base value. Therefore in need of a clean slate CSE finds the date 1 January 2000 is the best date to start new Indices: An All Share Price Index with new formula and base date 30th December 1999 (the last day of the year) and new base index of thousand (to mark the millenium) will replace the existing one and A completely new Selective Index incorporating 30 scrips with base date 30th December 1999 and base index 1000.We have studied index of a number of bourses and found that the Laspayers Method to calculate index is regarded as the most transparent and scientific method. The method is described below in this write-up. The following conditions will be followed while calculating the All Share Price Index: • All Share Price Index does not necessarily mean that all the listed stocks should be considered for calculating the index. Inactive stocks not being traded for consecutive six months will not be considered in the calculation. • Only the active scrips will be considered for calculating the index.
Mutual Funds and Debt securities will not be considered in calculating index. • A newly listed scrip will be included in the index after five consecutive trading days. • Only normal trades should be considered in calculating index. • All share price index will be calculated only once in a day – after the trading hour in the on line system. • No changes in number of shares will be allowed during VECTOR session. • Index committee will review the index – its criteria, performance, calculation method after every six month. • Index Base Date is 30th December 1999 • Base Day index 1000 • CSE selective index (cse – 30)At the beginning of new millennium a selective Index will be introduced, which is found to be very popular in almost all the developed exchanges worldwide.
Here the selection criteria play a very important role in forming an index. Criteria for a Selective Index: It provides a discussion about the important criterion for an index, which is to be used as a benchmark of performance. The criterion is that the movement of the index fully represents the aggregate movement of the index’s constituent assets and that the index’s returns are realizable by an investor who has held a portfolio identical to the asset mix of the index.Value-Weighted Index satisfies the above criterion. Selection of stocks for the benchmark index should be such that it represents the whole market. In addition it will be guaranteed that the constituent stocks have high percentage coverage of the market in terms of market value. This will make it difficult if not possible for a few investors to manipulate the movement of the index.
Criteria for cse-30 index: (After revision in the Listing ; Index Committee Meeting held on 28th Apr 2009) Two layer methods are followed for selection of listed companies in the CSE-30 Index.In the first layer method, basic criteria are considered for primary selection. Basic criteria: Must be listed with the Chittagong Stock Exchange Limited. 2. In case of IPO/New Issue, this should be on listing either with DSE or CSE for a minimum period of 2 years or remained in Commercial Production in Bangladesh for the minimum same period prior to its listing. 3. Companies that did not hold their Annual General Meetings regularly will not be considered.
4. Minimum market capitalization must be Tk. 200 million and at least two times of paid-up capital. . Must have at least 20% free floating share capital. Free floating share capital shall mean the share capital which will exclude Govt’s holding (other than ICB), Sponsors/Directors ; their Associates’ holding plus other locked-in portions. 6.
Must have positive revenue reserve/ retained earnings. 7. Must be traded for at least 50% trading days of the six monthly review period. 8. Paid dividend in any of the last 2 years. 9. Company having negative Earning Per Share (EPS) for last two consecutive years will not be considered.
On being qualified on the basis of the Basic Criteria, the companies are required to meet the following further Selection Criteria to have the final berth in CSE-30 Index. Selection criteria: 1. Higher Net Assets Value (NAV) per share 2. Higher rate of Earning Per Share (EPS) 3. Higher rate of Dividend 4. Lower Price Earning (PE) Ratio 5. Higher Dividend Yield (DY) 6.
Higher rate of free floating in equity 7. Larger number of shareholders 8. Higher liquidity in terms of trading day 9. Higher liquidity in terms of number of contract 10. Longer duration of continuous remaining in the CSE-30 Index 11.Regular payment of listing fees CSE Selective Categories Index – CSCX Chittagong Stock Exchange (CSE) launched a new index named CSCX (CSE Selective Categories’ Index) comprised A, B & G category companies from 14th February 2004 to replace the earlier CSE Trade Volume Weighted Index. The Base Date of this index is 15th April 2001 (when A, B & Z category were introduced) and Base Value is set to 1000.
The new index includes all but not the Z category companies. This also excludes the companies/scrips which are debt securities, mutual funds, suspended for indifinte period and non-traded for preceding six months of review meeting.The index will be reviewed in the Index Committee Meeting after every six months like other two indices of CSE. This index will be disseminated on line to all the Brokers’ Work Stations (BWSs) during trading sessions and after every three minutes the index value will be refreshed. The construction principle of this index based on Laspeyres method like other two CSE indices, CSE All Share Price Index and CSE-30 Index. It may be mentioned here that the base value of these two indices was also set to 1000 with a base date 30th December 1999. The current values (as on 11th Feruary 2004) of CSE All Share Price Index and CSE-30 Index are 1601.
4 and 1483. 60 respectively. IDLC Index While selecting the stocks to include in IDLC-50, a number of factors are considered: financial health of the company, regular trading in the market, investment risk, amount of investable shares, number of outstanding shares, price sensitiveness, price risk etc. IDLC-50 follows globally accepted methodology to include or exclude any stock in the index. As a result, IDLC-50 always represents fundamentally strong companies. This index is constructed following “Float Adjusted IV|arket Capitalization Weighted” methodology.This methodology is used for the first time to generate a capital market index in Bangladesh.
(more on this below) The performance of a stock market is affected by the price movement of the publicly traded shares (floated shares), rather than all outstanding shares. In our capital market, float is an important factor; because for many listed companies, a small portion of shares is publicly traded. So, to accurately measure the performance of the market segment comprising the selected 50 stocks, it is necessary to perform the index calculation by adjusting the number of publicly traded shares.This is called float adjustment. IDLC-50 is float-adjusted, and thus can represent the market more accurately. IDLC-50 will track the performance of 50 stocks traded in DSE and CSE. Existing indexes include either too many or too few shares.
IDLC-50 contains an optimum number of shares and incorporates the most relevant set of information required by rational investors. By containing appropriate number of liquid shares, IDLC-50 can be used to measure performance of professionally managed portfolios including mutual funds, discretionary portfolio accounts etc.Active investment in stock markets may not be advisable or feasible for individuals with lower investable wealth and risk tolerance. IDLC-50 may be used by individuals as an indicative tool for pursuing index-based investment strategy. In future, Mutual Funds, Index Futures, Exchange Traded Funds can be launched based on this index. Such instruments are widely used in major stock markets of the world. IDLC-50 can be a reliable performance indicator for the listed companies.
The listed companies would be able to compare their financial health with the help of IDLC-50.One of the most challenging jobs for an accurate index is to maintain consistency. For IDLC-50, we follow standard practices of globally accepted indexes for proper adjustment. It ensures that replacement of stocks in Index, additional issue of capital etc. do not destroy the historical value of the index. An index committee has been formed to conduct and monitor the overall operations of the index. The IDLC-50 Index Committee comprises capital market experts, fund managers market participants and senior officials from IDLC and Alif Assets.
The index committee will perform the following core responsibilities: Selecting stocks based on fundamental characteristics, monitoring index operation activity, reviewing the methodology and of the index. IDLC-50 follows internationally accepted methodologies recognized indexes. are selected based on the following indicators. o Public Float (Public portion of outstanding share) o Market Capitalization o Liquidity/Turnover o Sector representation o Price to Earning o A and N category o Average Market Risk (Standard deviation) etc. and is generated by algorithm of globally The following formula is applied to calculate the value of IDLC-50: Market Capitalization Today/ Market capitalization on base date) X Base Index value While calculating the market capitalization, IDLC-50 considers the public-traded portion of the outstanding shares. Stock market indices differ from one another basically in their sampling and/or weighting methods Sampling method: There are some market indices that are composed of all stocks listed in a market, e. g.
, the American Stock Market Index and the Hong Kong Stock Exchange All-Ordinaries Index. In general, an index based on a larger percentage of the total number of listed stocks will be more representative that one based on a smaller percentage.Although an index that consists of all listed stocks can be considered as more representative, a number of stocks may have very few transactions, the quoted price of these stocks may not reflect their true market value. An index may still be highly representative even if it consists of only a relatively small percentage of the total number of stocks. Here, the sample selection process plays an important role. Most of well-known stock market indices of the major stock markets in developed countries are still considered as highly representative since their constituent stocks comprise a high percentage of total value of the market.For example, the Hang Seng Index (Hong Kong) is composed of 33 constituent stocks comprising approximately 70% of total value.
FOX index (Finland) is composed of 25 most traded shares which is correspond to roughly 80% of the total market value and ATX 50 (Australia) comprises 84% of the capitalization and 97% of the turnover of all Australian stocks. Weighting method: Value-weighted method may be considered as a most appropriate method than others. For a value-weighted index, the weight of each constituent stock is proportional to its market share in terms of capitalization.We can assume that the amount of money invested in each of the constituent stocks is proportional to its percentage of the total value of all constituent stocks. Examples include all major stock market indices of Hong Kong, London and many others. ———————– ASSIGNMENT ON Done By: Minakshi Chakraborty Id No. 55 BBA, 13th Batch Department of Banking University of Dhaka Done For: Mr.
Hasibul Alam Chawdhory Lecturer Department of Banking University of Dhaka STOCK MARKET INDEX
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