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Stock Market Index and Global Stock Market Indices

Stock market indices play a crucial role in the world of finance, providing insights into market behavior and serving various functions. This discussion covers the functions of stock market indices, categories of holdings excluded from the definition of free float, and an overview of global stock market indices along with the methods used to calculate them.

Calculation Methodologies for Stock Indices

Market Capitalization Weighted

  1. Full Market Capitalization Method: This method determines a stock's weightage in the index by multiplying the number of shares outstanding by the market price of each share. Stocks with higher market capitalization have greater influence on the index. Examples include the S&P 500 Index in the USA and S&P CNX Nifty in India.

  2. Free-Float Market Capitalization Method: This method considers the percentage of shares that are freely available for purchase in the markets. It excludes shares with strategic investments, government holdings, and other restricted shares. This approach reflects the investible market capitalization, which may be lower than the total. It rewards companies with high free float and may marginalize companies with low free float.

Global Stock Market Indices

Dow Jones Industrial Average (DJIA)

  • Methodology: Price-based weightage, consisting of 30 constituents.

  • Characteristics: Widely watched and quoted, infrequent changes, includes large-cap stocks.

  • Notable Inclusions: Microsoft and Intel in 1999 were the first Nasdaq market stocks to be included.

Nasdaq 100 Index

  • Methodology: Includes the largest computer, software, and telecom stocks by market capitalization on the Nasdaq.

  • Requirements: Minimum average trading volume of 100,000 shares per day, and trading on a major exchange for at least a year or two.

S&P 500 Index

  • Methodology: Comprises 500 biggest publicly traded companies in the US by market capitalization.

  • Characteristics: Often considered a proxy for the US stock market, covers various sectors.

  • Requirements: Companies must be profitable, not closely held, and have a large trading volume for inclusion.

Global stock market indices provide valuable insights into the performance of different markets and are used by investors worldwide for benchmarking and investment decisions. Each index has its unique characteristics and methodology, making them suitable for various investment strategies.

Indian Stock Market Indices

Certainly, here are some key Indian stock market indices and their characteristics:

BSE Sensex (Bombay Stock Exchange Sensitive Index)

  • Methodology: Market capitalization-weighted, comprising 30 of the largest and most actively traded stocks on the BSE.
  • Characteristics: Often referred to as the bellwether index, representing the performance of major companies in various sectors of the Indian economy.
  • Base Year: Began on April 1, 1979, with a base of 100.

Nifty 50 (Nifty Fifty or NSE Nifty)

  • Methodology: Market capitalization-weighted, consisting of 50 actively traded stocks on the National Stock Exchange (NSE).
  • Characteristics: Represents a broad cross-section of the Indian equity market, making it a popular benchmark for Indian investments.
  • Base Year: Began on November 3, 1995, with a base of 1,000.

These Indian stock market indices play crucial roles in tracking and benchmarking the performance of various segments of the Indian equity market, catering to the diverse needs of investors and market participants.

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