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1. Financial Modeling

2. Security Price Index

3. Contents
What is Index
Types of stock Index
Uses of Index
Stock market
Market capitalization Index
Free- Float market capitalization index
Price weighted index
Sensex
Nifty

4. What is Index
An Index is a statistical aggregate that
measures change.”
It is and indicator
Sensex and Nifty are large capital index in
India.

5. Uses of Index
Indicator of market movement/returns
It reflects highly up-to-date information
Lead indicator of the economy

6. Stock Market
A stock market is a physical place, where
brokers gather to buy and sell stocks and
other securities.
It enables the trading of stocks
Stock market indexes are meant to capture
the overall behavior of equity markets

7. Types of Stock Index
There are mainly three types of stock index
1. Market capitalization weighted index
2. Free-float market capitalization weighted
index
3. Price weighted index

8. Market Capitalization Weighted
Index
Weights given based on the market
capitalization
Market Capitalization is the combined worth of
all the stocks of different companies within the
stock exchange.
Market Capitalization = No. of shares ×market
price of share

9. Free-Float Market Capitalization
Index
 Free float concept is and index construction methodology which
makes use of free float shares in the market.
 Free float market capitalization is the total worth of all shares of a
company which are available for trading in the open market.
 Excludes share held by
 Government
 Directors
 Promoters
 Holding through FDI route
 Equity held by employee welfare trust
 Free-float Market Capitalization = No. of trading shares × market
price of share

10. Price Weighted Index
A price- weighted index is an index in which
the member companies are weighted in
promotion to the price per share
Calculated by sum of the last traded price of
the total no of shares divided by the no of
stocks
Stocks with higher price have more weights

11. Example

12. Sensex
It is the market weighted stock index of 30
companies that are selected on the basic of
financial soundness and performance. Usually,
large and well-established companies that are
representatives of the various industrial
sectors are chosen.

13. How Sensex Is calculated
The Sensex is calculated using the Free-float
market capitalization method.
By using base value100 (1978-79)
Sensex is calculated for every 15 seconds

14. Question..
Suppose BSE index (SENSEX) consists of only two
stocks such as ‘X’ and ‘Y’
 Company ‘x’ has 10000 outstanding shares out of
which only 5000 are available for trading in open
market. Market price of share is Rs.100
 Company ’Y’ has 5000 outstanding shares out of
which 2000 shares are free float shares (open
market shares). Market price of share is Rs.50

15. Objective
To measure market movements
Benchmark for funds performance
For index based derivative products

16. Graph of SENSEX

17. Nifty
Nifty is an indicator of all the major companies
of NSE. The Nifty index is a composite of the
top 50 stocks listed on the national stock
exchange.

18. How Nifty is calculated
• Nifty 50 is compound using free float market
capitalization weighted method, where the total level
of the index reflects the total market value of all the
stocks in the index relative to a particular base period
• Base year is 1995 and base value (index value) is 1000

19. Question..
 Company ‘P’ has 20000 outstanding shares
out of which only 10000 are available for
trading in open market. Market price of share
is Rs.100
 Company ’Q’ has 15000 outstanding shares
out of which 8000 shares are free float shares
(open market shares). Market price of share is
Rs.50

20. Graph of NIFTY

21. Difference Between Sensex and Nifty
Sensex Nifty
Index value of BSE Index Value of NSE
30 companies are listed 50 companies are listed
narrow More broader
Base index value 100 (1978-79) Base Index value 1000(1995)

22. Importance of Index
Easy location
Save times and efforts
Efficiency
Cross reference
Reduce cost

23. Conclusion
An index is a statistical measure of the changes
in a portfolio of stocks representing the overall
market