Indian Index

As I have already explained in my previous post, how to calculate Sensex & Nifty. Now I will explain the same by taking an example

As on Feb 8 2011

SENSEX

Free float market capitalization = 1347365 Cr

Index Value = 100

Index market capitalization value in base year =7579 Cr ( Approx )

SENSEX = 13473650000000 * 100 / 75790000000

= 17777.6o

NIFTY

Free float market capitalization = 1565788 Cr

Index Value = 1000

Index market capitalization value in base year = 294764 Cr ( Approx )

NIFTY = 15657880000000 * 1000 / 2947640000000

= 5312.55

Index Calculation

I will be explaining how to calculate Index Value of Indian Stock exchanges. There are many ways to calculate Index value. They are

1. Free float Market Capitalization
2. Market Capitalization Weighted Average
3. Price Weighted Average

In India the method followed to calculate Index value is Free Float Market capitalization.

Free Float Market Capitalization

A Free float based index is regarded as a better benchmark and superior as it reflects the market trends in a more rational manner in comparision to a full market capitalization weighted index.

Free Float Market Capitalization as the name suggest it has two parts

• Free Float

This can be defined as the proportion of the total shares issued by the company which are readily avaliable for trading in the market.

According to BSE, any shares that DO NOT fall under the following criteria, can be considered to be open market/free float shares:

• Holdings by founders/directors/acquirers who has control element
• Holdings by persons/bodies with controlling interest
• Government holding as promoter/acquirer
• Holding through the FDI route
• Strategic stakes by private corporate bodies/individuals
• Equity held by employee welfare trust
• Locked in shares

A company has to submit a complete report about "who has how many of the company's shares" to the BSE.

• Market Capitalization

The market capitalization of a company means is simply multiply current market price of each share by number of outstanding shares issued by the company.

Market Capitalization = Current market price * No. of shares traded in stock market

Depending on the value of the market cap, the company will either be a "Mid-cap" or "Large-cap" or "Small-cap" company.

Free float market capitalization = Free float * Market Cap

Now we will calculate Sensex

1. Find out the "free float market cap" of all 30 companies
2. Add all the "free float market cap's of all the 30 companies
3. Make all this relative to the Sensex base. The value you get is the Sensex value.

Sensex = Sum of free float market capitalization of 30 stocks of BSE * Index Value ( 100 ) /market capitalization value of base year

NIFTY = Sum of free float market capitalization of 50 stocks of NSE * Index Value ( 1000) / Market capitalization value of base year

Important Indices in the World

Indian Financial System

Financial system plays a vital role in the economic development of a country. The financial system intermediates the flow of funds from the savers to the investors.
A financial system is a complex, well-integrated set of sub-systems of financial regulators, Institutions, Instruments, Markets and Services which facilitates the transfer and allocation of the funds efficiently and effectively.
The Indian financial system is broadly divided into two systems . They are

• Formal Financial system (Organized)
• Informal Financial system (Unorganized)

Informal Financial system (Unorganized)
Ex :- Money lenders, relatives, landlords, saving clubs etc..

Advantages

• Low transaction cost
• Minimum default risk
• Transparency of the procedure

Disadvantages

• Interest rates are high
• unregulated

Formal Financial system (Organized)

It has four components or segments ans they are as follows

1. Financial Institutions
2. Financial Markets
3. Financial Instruments
   
4. Financial services

All the above four components are regulators by specific regulators
ex :- Capital Market - SEBI
Money market - RBI
Now we will grow through quickly about all the four components

Structure of Indian Financial System

1. Financial Institutions
   

These are the intermediaries that mobilise the savings and facilitates the allocation of the funds to the investors in an efficient and effective manner.

They are further classified into

• Banking Institutions
• Non-Banking Institutions
• Mutual Funds
• Insurance and housing Finance companies.

2. Financial Markets

These are mechanism enabling participants to deal in financial claims.

Types of Financial Markets

1. Money Markets :- short term debt instruments
2. Capital Markets :- Long term equity and debt instruments

Segments of Financial Markets

1. Primary Markets:- A market for new/fresh/initial issues
2. Secondary Markets :- A market for trading of the outstanding issues
   

3. Financial Instruments

This is a claim against a person or an institution for payment, at a future date, of a sum of money and/or a periodic payment in the form of interest or dividend.
This are marketable and tradeable in the primary and secondary market.

ex:- Bonds, debentures etc..

4. Financial services

The services linked with

• borrowing and funding
• lending and investing
• buying and selling securities
  
• making and enabling
  
• payments and settlements and
  
• managing risk exposures in financial markets.

ex:- Credit Rating, Leasing, Hire Purchase etc...

Functions of financial Systems

• Mobilise and allocate savings
• Monitor corporate performance
• Provide payment and settlements system
• optimum utilization of risk-bearing and reduction
• Disseminate price-related information
• Portfolio adjustment facility
• Lower the cost of transaction
• Process of financial deepening and broadening