Haylo.....Are the results out yet ??!!!
yaar u will get thru 😃
.............i want to learn the mechanism..but thought i might wait till my Fin courses are over !!!
yes both u and mailtabrez are correct that its Market value wighted average unlike dow jones which is a price value weighted average.
Market value weighted average gives weight to each stock in its index portfolio on the basis of its market cap.
i.e if u invest in the each scrip of the portfolio based on the market cap the ur returns (excluding dividents) is equal to the % change in the index.
well ill explain thru a very simple example
lets say index has two stocks
name\no. of outstanding shares\price of each share\ market cap
A --- 1000 - 50 -- 50,000
B --- 800 - 75 -- 60,000
so u can see weight of B > A
Total market cap is 110 , 000 => base value say
100now after some time share of A rise by 20% => 60 and share of B goes down by 20% => 60
so ur total market cap is 60 * 1000 + 60 * 800 = 108, 000
so now ur index value is (108,000/110,000) * 100 =
98.18so now u see that even if both the share experinced same increase and decrease there was a net decrease in the index value of 1.82 points.
ie u have made -ve returns pf -1.82% because ur portfolio was more heavily invested in stoack of B (becuase it had more weight in the index).
Lets come to stock split lets say B has a stock split in ratio 1:1 ie now there are 1600 (800*2) shares of B. Lets say price of each share after split is 30 (60/2)
total market cap is : 60 * 1000 + 1600 * 30 = 108, 000 => index =
98.18so u see a stock split had no effect on the returns provided after a stock split share of price does not rise.-------------Error corrected --------------------------------------------------
in case of bonus issue and rights issue the index gets adjusted.
let us say B issues 100 shares worth 30 then the base market cap would be changed to ( 108, 000 + 100 * 30) / 98.18 (old base) = 113,060
This is done so that now ( 108, 000 + 100 * 30) = 111,000 should be equal to 98.18
now the figures are as folowed
A --- 1000 - 60 -- 60,000
B --- 1700 - 30 -- 51,000
Total = 111,000 base = 113,060 index still = 98.18
now lets say A increase by 20% and B decrease by 20% (same as before)
A => 72 B => 24
Total market cap = (1000 * 72 + 24 * 1700) = > 112,800
now ur index is (112,800/113,060) *
100 =
99.77so same increase and decrease has given u returns of (99.77 - 98.1
/98.18 = 1.61% unlike last time of -1.8%
this is because now ur portfolio is more heavily invested in B
so one has to change his portfolio as stock of a share rise/fall, as stock splits occur and as rights or new issues come .
any way this is a smallish example.
hope it helps
Sensex is more complicated as it takes free float into consideration.
would talk bout that some times later
further complication comes once stock replacement takes place (I have to study that)
so now u see how 100 in 78 -79 is 6000 today .. (base has been changed so many times + stock price have risen)
btw
no one has answered my first question
cheers
:)
ps: this is my own example and there may be error in my application of the theory .. please correct me if i am wrong (
/98.18 = 1.61% unlike last time of -1.8%
.. but seriously, if thr's a hung parliament... there are a lot of chances that sensex will fall below 5000.... 😞 😞 ... khair if you are in it for the long haul... hang on thr...