17
CHAPTER 2
STOCK MARKET: AN OVERVIEW
2.1 INTRODUCTION………..18
2.2 HISTORY OF WORLD STOCK MARKET………..18
2.3 THE ROLE OF STOCK EXCHANGES……….22
2.4 MAJOR STOCK EXCHANGES………..27
2.5 REQUIREMENTS BY STOCK EXCHANGE………...29
2.6 OWNERSHIP……….30
2.7 HISTORY OF INDIAN STOCK MARKET………...30
2.8 THE BOMBAY STOCK EXCHANGE………...38
2.9 STOCK MARKET INDEX………...45
18
2.1
INTRODUCTION
Stock exchange is a mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. In common men's language Stock markets refer to a market place where investors can buy and sell stocks. The price at which each buying and selling transaction takes place is determined by the market forces (i.e. demand and supply for a particular stock).
Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. To trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are equipped with electronic networks, which gives them advantages of speed and cost efficiency of transactions. Only members are entitling to Trade on an exchange. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks. Usually there is no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities.
2.2
HISTORY OF WORLD STOCK MARKET
2.2.1 The First Stock Exchanges
It is believed that the first stock was established in 11th century France, where the courtiers de change were concerned with managing and regulating the debts of Agricultural communities on behalf of the Banks. Some stories suggest that the origins of the term "bourse" come from the Latin bursa meaning a bag because, in
19 13th century Bruges, the sign of a purse (or perhaps three purses), hung on the front of the house where merchants met
There were people in Pisa, Verona, Genoa and Florence who also began trading in government securities during the 14th century. This was only possible because these were independent city states ruled by a council of influential citizens, not by a duke. The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits—or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stock and bonds. In 1688, the trading of stocks began on a stock exchange in London.
On May 17, 1792, twenty-four supply brokers signed the Buttonwood Agreement outside 68 Wall Street in New York underneath a buttonwood tree. On March 8, 1817, properties got renamed to New York Stock & Exchange Board. In the 19th century, exchanges got substantiated to trade futures contracts and then choices contracts, generally famous as futures exchanges.
2.2.2 London Stock Exchange - 1698
London Stock Exchange is arguably the oldest of the world's major stock exchanges. The London Exchange can trace its history back to 1698 when its founder - John Casting - began to organize the market in Jonathan's Coffee-house via a simple list of stock and commodity prices. Today, this exchange lists 3,500 companies representing 84 countries.
2.2.3 New York Stock Exchange - 1792
The New York Stock Exchange or NYSE is arguably the oldest and most well known of all the American stock markets. The NYSE was formed in 1792 when two dozen stockbrokers from New York City had the idea to organize what was then a disorganized and chaotic method of stock trading. From those humble beginnings, the NYSE has continued to grow and today lists 2,800 companies with a total capitalization of nearly $20 trillion. In 2007 a historic merger of equals created the NYSE Euro next.
20 2.2.4 Bombay Stock Exchange – 1875
The Bombay Exchange, also known as Mumbai, claims to be the oldest stock exchange in Asia, tracing its history back to 1875. In 2008, nearly 2,000,000 shares of stock traded daily on the Bombay Exchange.
2.2.5 American Stock Exchange - 1849
The American Stock Exchange or Amex is a relatively recent addition to the world's stock markets. The history of this stock market begins with the Curb Exchange and the California Gold Rush of 1849. The Amex played an important part in the financial and business transactions associated with the mining industry in the 19th century. In 1921, the Amex expanded it niche role to include companies that did not meet the strict standards of the NYSE. In 1998, the NASDAQ purchased Amex and it continues its history of being a niche market player and today specializes in derivatives and stock options. In late 2003, the American Stock Exchange regained its independence. After only six years under the control of NASDAQ, The Amex Membership Corporation completed an agreement to transfer control of the exchange back to its membership.
2.2.6 NASDAQ - 1971
Yes, we've even included a relatively recent addition in this article on stock market history. And that's because we recognize the importance of this particular exchange. At one time most companies aspired to be traded on the NYSE. That changed about 10 years ago and many large companies now trade on the NASDAQ. Founded in 1971, the National Association of Securities Dealers Automated Quotation or NASDAQ was the first stock exchange to recognize the role of electronics in stock trading.
Today, stock exchanges operate around the world, and they have become highly regulated institutions. Investors wanting to buy and sell shares must do so through a share broker, who pays to own a seat on the exchange. Companies with shares traded on an exchange are said to be 'listed' and they must meet specific criteria, which varies across exchanges. Most stock exchanges began as floor exchanges, where
21 traders made deals face-to-face. The largest stock exchange in the world, the New York Stock Exchange, continues to operate this way, but most of the world's exchanges have now become fully electronic. The graphs below show (Chart 2.1 & 2.2) world markets in both 1900 and 2000 and the anomalous growth of the U.S. market during this time. While having 10% market share in 1900 India is leading stock market, but in 2000 market share of India is reduced drastically.
Chart 2.1 Stock Market In 1900
Chart 2.2 Stock Market In 2000
Source: Triumph of the optimists
22 12 25 4 2 11 10 4 3 7 USA UK EUROLAND JAPAN SOUTH AFRICA RASSIA INDIA AUSTRIA, HUNGARY LATIN AMERICA 47 8 13 13 2 11 6 USA UK EUROLAND JAPAN CANADA OTHER FORM 1900 NEW MARKET
22
2.3
THE ROLE OF STOCK EXCHANGES
The role of a stock exchange for any country appears to be vitally important. For any countries moving toward economic assimilation of enlistment and proficient allocation of savings to productive investments stock market play imperative role. This is largely proficient through a sound financial architecture. Quite a lot of the most flourishing evolution economies have achieved stupendous increases in the savings rate with lends a hand of stock exchanges. Stock exchanges are indispensable to support savings and investment in successful conversion countries. Companies often face Liquidation problems that the banking system is powerless or reluctant to address. With a functioning stock market it becomes easier for these firms to find sources of capital in both domestic and international capital markets. A properly functioning stock exchange will not only help companies raise capital, but also help individuals and organizations to diversify their holdings. With thinly traded markets liquidity problems discourage participation by these investors in the financial system. As such, investors will demand higher risk premiums to compensate for lack of liquidity. Thus the company in need of capital is placed at a disadvantage because only relatively more expensive credit is available. Solving this problem has helped companies to raise more capital in the most successful transition economies while failure to do so has constrained growth in some of the more backward states. Role of stock exchanges include the following29
2.3.1 Raising capital for businesses
The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. They encourage investment by providing places for buyers and sellers to trade securities. This investment, in turn, enables corporations to obtain funds to expand their businesses.30
29
Diamond, Peter A. (1967). "The Role of a Stock Market in a General Equilibrium Model with Technological Uncertainty". American Economic Review 57 (4): 759–776.
30
Gilson, Ronald J.; Black, Bernard S. (1998). "Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets". Journal of Financial Economics 47: 243–277.
23 Corporations issue new securities in the primary market, usually with the help of investment bankers. Company negotiates price and then makes the securities available for its clients and other investors. This is called an initial public offering (IPO).
In this primary market, corporations receive the proceeds of stock sales. After this initial offering, the securities are bought and sold in the secondary market. The corporation is not usually involved in the trading of its stock in the secondary market; therefore stock exchanges will essentially function as a secondary market. By providing investors the opportunity to trade financial instruments, the stock exchanges support the performance of the primary markets. This arrangement makes it easier for a corporation to raise the funds that they need to build and expand their businesses. Although corporations do not directly benefit from secondary market transactions, the managers of a corporation closely monitor the price of the corporation‘s stock in secondary markets. Reasons for this concern involves the cost of raising new funds for further business expansion, the perceived 'strength' of a company (and whether it is vulnerable to a takeover) and of course, their options and bonus packages!
There are benefits and new obligations that come from raising capital through a public offering:
Benefits
Company‘s access to capital will increase, since you can contact more potential investors.
Company may become more widely known.
Company may obtain financing more easily in the future if investor interest in your company grows enough to sustain a secondary trading market in your securities.
Controlling shareholders, such as the company's officers or directors, may have a ready market for their shares, which means that they can more easily sell their interests at retirement, for diversification, or for some other reason.
24
Company may be able to attract and retain more highly qualified personnel if it can offer stock options, bonuses, or other incentives with a known market value.
The image of company may be improved.
Obligations
Company must continue to keep shareholders informed about the company's business operations, financial condition, and management, incurring additional costs and new legal obligations.
Company may be liable if you do not fulfill these new legal obligations.
Company may lose some flexibility in managing your company's affairs, particularly when shareholders must approve your actions.
Company public offering will take time and money to accomplish.
2.3.2 Mobilizing savings for investment
When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels of firms.
2.3.3 Facilitating company growth
The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity. An important aspect of modern financial markets, however, including the stock markets, is absolute discretion. For example, American stock markets see more unrestrained acceptance of any firm than in smaller markets attention must be given to
25 the foreign Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion.
2.3.4 Profit sharing
Both casual and professional stock investors, through dividends and stock price increases that may result in capital gains, will share in the wealth of profitable businesses.
2.3.5 Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies. The dot-com bubbles in the early 2000s, and the subprime mortgage crisis in 2007-08, are classical examples of corporate mismanagement. Companies like Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam(2001), Webyan (2001), Adelphia (2002), MCI World Com (2002), Parmalat (2003), American International Group (2008), Lehman Brothers (2008), and Satyam Computer Service(2009) were among the most widely scrutinized by the media.
26 2.3.6 Creating investment opportunities for small investors
As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.
2.3.7 Government capital-raising for development projects
Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such bonds can obviate the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.
2.3.8 Barometer of the economy
Form the history of many countries it has shown that the price of share and other assets is an important part of the dynamics of economic activity. The price of these assets can influence or be an up and coming economy. Many times the stock market is considered the primary indicator of a country‘s economic development and strength. If the stock market is rising it tends to be associated with increased business and investments, and if the stock market if falling associated with deceased business and investments. It can also be observed that share prices also affect the wealth of households and their consumption. At the stock exchange share price rise or fall may depending largely on market forces and sentiments. When the economy is stable or growing the share prices tense to raise or remain stable, but when economic face recession, depression or financial crisis result in stock market crash. Therefore the
27 movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.
2.4
MAJOR STOCK EXCHANGES
Twenty Major Stock Exchanges Of The World: Market Capitalization & Year-to-date Total Turnover at the end of August 2009.
Table 2.1 Major Stock Exchanges of World (August 2009 Figure in Million USD)
Region Stock Exchange Market Value Total Share Turnovers
America São Paulo Stock Exchange 1,032,518.40 361,959.00 America Toronto Stock Exchange 1,432,877.00 798,193.10 America New York Stock Exchange 10,842,001.90 12,158,620.60 Asia-Pacific Australian Securities Exchange 1,066,513.20 560,912.80 Asia-Pacific Bombay Stock Exchange 1,082,572.00 171,176.20 Asia-Pacific Hong Kong Stock Exchange 1,945,517.70 970,227.60
Asia-Pacific Korea Exchange 727,125.30 1,050,473.80
Asia-Pacific National Stock Exchange of India 1,019,109.00 506,652.30 Asia-Pacific Shanghai Stock Exchange 2,142,756.80 3,315,768.50 Asia-Pacific Shenzhen Stock Exchange 596,320.20 1,701,256.80 Asia-Pacific Tokyo Stock Exchange 3,478,602.50 2,675,983.30
Europe Euro next 2,605,097.60 1,195,962.20
Europe Frankfurt Stock Exchange (Deutsche Börse) 1,204,292.00 1,589,736.70 Europe London Stock Exchange 2,560,491.10 2,321,518.50 Europe Madrid Stock Exchange (Bolsas y Mercados
Españoles)
1,178,525.60 1,040,751.10
Europe Milan Stock Exchange (Borsa Italiana) 636,674.80 565,759.30 Europe Nordic Stock Exchange Group OMX1 781,146.30 503,049.90
Europe Swiss Exchange 992,356.40 520,867.50
Note: includes the Copenhagen, Helsinki, Iceland, Stockholm, Tallinn, Riga and Vilnius Stock Exchanges
Sources: World Federation of Exchanges - Statistics / Monthly
Remarks: There are 2 pending major mergers: NASDAQ with OMX; and London Stock Exchange with Milan Stock Exchange
28 Chart 2.3 Market Value
Chart 2.4 Total Share Turnovers
Source: From the table 2.1
0.00 4,000,000.00 8,000,000.00 12,000,000.00 São Paulo Stock Exchange
Toronto Stock Exchange New York Stock Exchange Australian Securities Exchange Bombay Stock Exchange Hong Kong Stock Exchange Korea Exchange National Stock Exchange of India Shanghai Stock Exchange Shenzhen Stock Exchange Tokyo Stock Exchange Euro next Frankfurt Stock Exchange (Deutsche Börse) London Stock Exchange Madrid Stock Exchange (Bolsas y … Milan Stock Exchange (Borsa Italiana)
Nordic Stock Exchange Group OMX1
Swiss Exchange Market …
0.00 5,000,000.00 10,000,000.00 15,000,000.00 São Paulo Stock Exchange
Toronto Stock Exchange New York Stock Exchange Australian Securities Exchange Bombay Stock Exchange Hong Kong Stock Exchange Korea Exchange National Stock Exchange of India Shanghai Stock Exchange Shenzhen Stock Exchange Tokyo Stock Exchange Euro next Frankfurt Stock Exchange (Deutsche …
London Stock Exchange Madrid Stock Exchange (Bolsas y … Milan Stock Exchange (Borsa Italiana)
Nordic Stock Exchange Group OMX1
29
2.5
REQUIREMENTS BY STOCK EXCHANGE
Companies have to meet the requirements of the exchange in order to have their stocks and shares listed and traded there, but requirements vary by stock exchanges: 2.5.1 Bombay Stock Exchange
Bombay Stock Exchange (BSE) has requirements for a minimum market capitalization of Rs.250 Million and minimum public float equivalent to Rs.100 Million.31
2.5.2 London Stock Exchange
The main market of the London Stock Exchange has requirements for a minimum market capitalization (£700,000), three years of audited financial statements, minimum public float (25 per cent) and sufficient working capital for at least 12 months from the date of listing.
2.5.3 NASDAQ Stock Exchange
To be listed on the NASDAQ a company must have issued at least 1.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years. 32
2.5.4 New York Stock Exchange
To be listed on the New York Stock Exchange (NYSE) a company must have issued at least a million shares of stock worth $100 million and must have earned more than $10 million over the last three years. 33
2.5.5 Other types of exchanges
In the 19th century, exchanges were opened to trade forward contracts on commodities. Exchange traded forward contracts are called futures contracts. These commodity exchanges later started offering future contracts on other
31
www.bseindia.com/about/abintrobse/listsec.asp
32
NASDAQ Corporate -NASDAQ Listing Information ,ww.nasdaq.com/about/listing_information.stm
33
30 products, such as interest rates and shares, as well as Options contracts. They are now generally known as futures exchanges.
2.6
OWNERSHIP
Stock exchanges originated as mutual organizations, owned by its member stock brokers. There has been a recent trend for stock exchanges to demutualize, where the members sell their shares in an initial public offering. In this way the mutual organization becomes a corporation, with shares that are listed on a stock exchange. Examples are:
Australian Securities Exchange (1998), Euro next (merged with New York Stock Exchange), NASDAQ (2002), The New York Stock Exchange (2005), Bolsas Mercados Espanoles, and the Sao Paulo Stock Exchange (2007). The Shenzhen and Shanghai stock exchanges can be characterized as quasi-state institutions insofar as they were created by government bodies in China and their leading personnel are directly appointed by the China Securities Regulatory Commission.
2.7
HISTORY OF INDIAN STOCK MARKET
The stock exchange in Mumbai is more than 100 years old. The origin of the stock market in India dates back to the end of the eighteenth century when long term negotiable securities were first issued. The real beginning however, occurred in the middle of the nine teeth century, after the enactment of the Companies Act in 1850 which introduced the feature of limited liability, and generated investor interest in corporate securities.
The Native Share and Stock Brokers‘ Association, now known as the Bombay Stock Exchange (BSE) was formed in Bombay (now Mumbai) in 1875. This was followed by the formation of association in Ahmadabad in 1894, Calcutta (now Kolkata) in 1908 and Madras (now Chennai) in 1937. In order to promote the orderly development of the stock market, the central government introduced a comprehensive legislation called the Securities Contracts (Regulation) Act, 1956.
31 The Calcutta Stock Exchange (CSE) was the largest stock exchange in India till the 1960s. In 1961, there were 1203 listed companies across the various stock exchanges of the country. Of these, 576 were listed on the CSE and 297 on the BSE. However, during the later half of the 1960s, the relative importance of the CSE declined while that of the BSE increased sharply.
One of the oldest stock markets in Asia, the Indian Stock Markets have a 200 years old history.
Table 2.2 Origin of Indian Stock Market
Year Events
18th Century
East India Company was the dominant institution and by end of the century, business in its loan securities gained full momentum
1830's Business on corporate stocks and shares in Bank and Cotton presses started in Bombay. Trading list by the end of 1839 got broader
1840's Recognition from banks and merchants to about half a dozen brokers
1850's Rapid development of commercial enterprise saw brokerage business attracting more people into the business
1860's The number of brokers increased to 60
1860-61 The American Civil War broke out which caused a stoppage of cotton supply from United States of America; marking the beginning of the "Share Mania" in India
1862-63 The number of brokers increased to about 200 to 250
1865 A disastrous slump began at the end of the American Civil War (as an example, Bank of Bombay Share which had touched Rs. 2850 could only be sold at Rs. 87)
1874 With the rapidly developing share trading business, brokers used to gather at a street (now well known as "Dalal Street") for the purpose of transacting business.
1875 "The Native Share and Stock Brokers' Association" (also known as "The Bombay Stock Exchange") was established in Bombay
1880's Development of cotton mills industry and set up of many others
1894 Establishment of "The Ahmadabad Share and Stock Brokers' Association" 1880 -
90's
Sharp increase in share prices of jute industries in 1870's was followed by a boom in tea stocks and coal
1908 "The Calcutta Stock Exchange Association" was formed
1920 Madras witnessed boom and business at "The Madras Stock Exchange" was transacted with 100 brokers.
32
1934 Establishment of the Lahore Stock Exchange
1936 Merger of the Lahore Stock Exchange with the Punjab Stock Exchange
1937 Re-organization and set up of the Madras Stock Exchange Limited (Pvt.) Limited led by improvement in stock market activities in South India with establishment of new textile mills and plantation companies
1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited was established 1944 Establishment of "The Hyderabad Stock Exchange Limited"
1947 "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks and Shares Exchange Limited" were established and later on merged into "The Delhi Stock Exchange Association Limited"
Sources: www.surfindia.com, www.appuonline.com. 2.7.1 Post Independence Scenario
The depression witnessed after the Independence led to closure of a lot of exchanges in the country. Lahore Stock Exchange was closed down after the partition of India, and later on merged with the Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and got recognition only by 1963. Most of the other Exchanges were in a miserable state till 1957 when they applied for recognition under Securities Contracts (Regulations) Act, 1956. The Exchanges that were recognized under the Act were:
Bombay, Calcutta, Madras, Ahmadabad, Delhi, Hyderabad, Bangalore, Indore
2.7.2 Many more stock exchanges were established during 1980's, namely
Cochin Stock Exchange (1980)
Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982)
Pune Stock Exchange Limited (1982)
Ludhiana Stock Exchange Association Limited (1983)
Gauhati Stock Exchange Limited (1984)
33
Magadh Stock Exchange Association (at Patna, 1986)
Jaipur Stock Exchange Limited (1989)
Bhubaneswar Stock Exchange Association Limited (1989)
Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989)
Vadodara Stock Exchange Limited (at Baroda, 1990)
Coimbatore Stock Exchange
Meerut Stock Exchange
At present, there are twenty one recognized stock exchanges in India which does not include the Over The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL).
Government policies during 1980's also played a vital role in the development of the Indian Stock Markets. There was a sharp increase in number of Exchanges, listed companies as well as their capital, which is visible from the following table:
Table 2.3 Pattern of Growth of Stock Exchanges
Source : SEBI annual report.
2.7.3 Trading Pattern of the Indian Stock Market
Indian Stock Exchanges allow trading of securities of only those public limited companies that are listed on the Exchange(s). They are divided into two categories:
S. No
As on 31st December 1946 1961 1971 1980 1991 1995 2000 2005
1 No. of Stock Exchanges 7 7 8 9 20 22 23 23
2 No. of Listed Cos. 1125 1203 1599 2265 6229 8593 9413 4731 5 Market value of Capital
of Listed Cos. (Cr. Rs.)
34 Chart 2.5 Trading Pattern of the Indian Stock Market
Source: www.bseindia.com
2.7.4 Types of Transactions
The flowchart below describes the types of transactions that can be carried out on the Indian stock exchanges:
Chart 2.6 Types of Transactions
Source: www.bseindia.com
Listed Securities of Public limited companies.
Specified securities (forward List)
Equity shares of company that are: -Dividend paying
- growth orinted companies
- paid up capital of atleast Rs.50 million - Market capitalisation of atleast Rs.100 million - has more than 20,000 shareholders.
Non specicied Securities (Cash List)
equity shares of companies not covered in specified securities
Transactions on Indian Stock Exchanges
Spot Delivery Transactions
Forward
Transactions
35 Spot Delivery Transactions:
Includes transactions that require delivery and payment within stipulated time period at the time of entering into the contract.
This period shall not be more than 14 days following the date of the contract. Forward Transactions
Transactions in which delivery and payment can be extended by further period of 14 days each.
The overall period should not exceed 90 days from the date of contract.
Transactions permitted only in case of specified shares.
2.7.5 Indian stock exchange allows a member broker to perform following activities
Act as an agent,
Buy and sell securities for clients and charge commission for the same,
Act as a trader or dealer as a principal,
Buy and sell securities on their account and risk.
2.7.6 Over The Counter Exchange of India (OTCEI)
Traditionally, trading in Stock Exchanges in India followed a conventional style where people used to gather at the Exchange and bids and offers were made by open outcry. This age-old trading mechanism in the Indian stock markets used to create much functional inefficiency. Lack of liquidity and transparency, long settlement periods and benami transactions are a few examples that adversely affected investors. In order to overcome these inefficiencies, OTCEI was incorporated in 1990 under the Companies Act 1956. OTCEI is the first screen based nationwide stock exchange in India created by Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries and Can Bank Financial Services.
36 Chart 2.7 Securities traded on the OTCEI
Source: www.bseindia.com Listed Securities
Securities of the companies listed on the OTC.
Can be bought or sold at any OTC counter across India.
Should not be listed anywhere else.
Permitted Securities
Certain securities (Shares and debentures listed on other exchanges).
Unites of Mutual funds can be traded.
Initiated Debentures
An equity holding a minimum of one lakh debentures of a particular scrip can offer them for trading on the OTC
Advantages of OTCEI
Greater liquidity and lesser risk of intermediary charges due to widely spread trading mechanism across India The screen-based scrip less trading ensures transparency and accuracy of prices Faster settlement and transfer process as compared to other exchanges Shorter allotment procedure (in case of a new issue) than, other exchanges. 2.7.7 National Stock Exchange
In order to lift, the Indian stock market trading system at par with the international standards. On the basis of the recommendations of high powered Pherwani
Securities teaded on the OTCEI Listed Securities Permitted Securities Initiated Debentures
37 Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others.
2.7.7.1 NSE provides exposure to investors in two types of markets, namely
Wholesale debt market Capital market
Wholesale Debt Market - Similar to money market operations, debt market operations involve institutional investors and corporate bodies entering into transactions of high value in financial instruments like treasury bills, government securities, commercial papers etc.
Capital market- A capital market is a market for securities (debt or equity) where business enterprises and governments can raise long term funds. It is defined as a market in which money is defined as a market in which money is provided for periods longer than a year34 as the raising of short term funds takes place on other markets. Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over the counter, or elsewhere.
2.7.8 Trading at NSE & BSE
Fully automated screen-based trading mechanism
Strictly follows the principle of an order-driven market
Trading members are linked through a communication network
34
Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River,: Pearson Prentice Hall.
38
This network allows them to execute trade from their offices
The prices at which the buyer and seller are willing to transact will appear on the screen
When the prices match the transaction will be completed
A confirmation slip will be printed at the office of the trading member.
2.7.8.1 Advantages of trading at NSE & BSE
Integrated network for trading in stock market of India
Fully automated screen based system that provides higher degree of transparency
Investors can transact from any part of the country at uniform prices
Greater functional efficiency supported by totally computerized network
2.8
THE BOMBAY STOCK EXCHANGE
Formerly, the Stock Exchange, Mumbai, popularly called Bombay Stock Exchange, or BSE is the oldest stock exchange in Asia and has the greatest number of listed companies in the world, with 4700 listed as of August 2007. 35
It is located at Dalal Street, Mumbai, India. On 31 December 2007, the equity market capitalization of the BSE was US $ 1.79 trillion, making it the largest stock exchange in South Asia and the 12th largest in the world.
With over 4700 Indian companies list on the stock exchange, [10] and it has a significant trading volume. The BSE SENSEX (SENSITIVE INDEX), also called the ―BSE 30‖, is a widely used market index in India and Asia. Though many other exchanges exist, BSE and the National Stock Exchange of India account for most of the trading in shares in India.
35
39 2.8.1 History of the Bombay Stock exchange
Trading in securities has been in vogue in India for a little over 200 years. Trading in securities dates back 1793, most of them being transactions in loan securities of the East India Company. The broking community prospered as there was a rise in prices which led to a share mania during 1861-65. This bubble burst in 1865 when the American Civil War ended. The brokers realized that investor confidence in the securities market could be sustained only by organizing themselves into a regulated body with defined rules and regulations. The realization resulted in formation of ―The Native Share and Stock Brokers‘ Association‖ which later came to be known as the Bombay Stock Exchange. In 1875, these brokers assembled at a place, now called Dalal Street.
The Bombay Stock Exchange is a voluntary, nonprofit making association of broker members. It emerged as a premier stock exchange after the 1960. The increased pace of industrialization caused by the two world wars, protection to the domestic industry, and the government‘s fiscal policies aided the growth of new issues which, in turn, helped the BSE to prosper. The BSE dominated the Indian Capital Market by accounting for more than 60 per cent of the all Indian turn over.
Until 1992, the BSE operated like a closed club of selected members. With the securities scam outburst in 1992 and the SEBI taking over the rains of the Stock Market, the BSE had to bring about changes in its operational policies. Until March 1995 the BSE had an open outcry system of trading. However when faced with stiff competition from NSE the country‘s first modern, computerized and professionally managed stock exchange set up in 1994, the BSE had to change its system of trading and operation .
On 14 March 1995, the BSE turned to electronic trading whereby brokers trade using computers. This system is known as the BSE On-line Trading System (BOLT). The introduction of BOLT helped in improving trading volumes, significantly reducing the spread between buy and sell orders, better trading in odd lot shares, fixed income instruments and dealings in the renunciation of rights shares.
40 In 1995, BOLT was limited to Mumbai, whereas the NSE was operating at the national level. As a result, the BSE submitted a proposal for allowing installation of terminals connected to BOLT in centers outside Mumbai. After rejecting the proposal four times, on 29 october 1996, the SEBI finally allowed the BSE to use its BOLT system nationwide. Later the BSE set up a central depository system to dematerialize shares and promote demate Account (trading).
2.8.2 Hours of Operation
Beginning of the Day Session 8:00 to 9:00
Trading Session 9:00 to 15:30
Position Transfer Session 15:30 to 15:50
Closing Session 15:50 to 16:05
Option Exercise Session 16:05 to 16:35
Margin Session 16:35 to 16:50
Query Session 16:50 to17:35
End of Day Session 17:35
The hours of operation for the BSE quoted above are stated in terms of the local time (i.e GMT+5:30) in Mumbai India.
BSE‘s normal trading sessions are on all days of the week except Saturdays, Sundays and Holidays declared by the Exchange in advance. 36
2.8.3 Services of BSE
BSE also had a wide range of services to empower investors and facilitate smooth transactions. These services are as follows,
2.8.3.1 Investor Services
The Dept. of investor services redresses grievances of investors. BSE was the first exchange in the country to provide an amount of Rs. 1 million towards the investor
36
41 protection fund, it is an amount higher than that of any exchange in the country. BSE launched a nationwide investor awareness program ―Safe Investing in the Stock Market‖ under which 264 programmers were held in more than 200 cities.
2.8.3.2 The BSE Online Trading (BOLT)
BSE on line Trading (BOLT) facilities on-line screen based trading in securities. BOLT is currently operating in 25,000 trader work stations located across over 399 cities in India.
2.8.3.3 BSEWEBX.com
In February 2001, BSE introduced the world‘s first centralized exchange based Internet trading system, BSEWEBX.com. This initiative enables investors anywhere in the world to trade on BSE platform.
2.8.3.4 Surveillance
BSE‘s Online Surveillance System (BOSS) monitors on a real time basis the price movements, volume position and real time measurements of the default risk, market reconstruct and generation of cross market alerts.
2.8.3.5 BSE Training Institute
BTI imparts capital market training and certification in collaboration with reputed management institutes and universities. It offers over 40 courses on various aspects of the capital mark and financial sector. More than 20,000 people have attended the BTI program.
2.8.4 Awards
Fowling awards were given to BSE.
The world council of Corporate Governance has awarded the Golden Peacock Global CSR Award for BSE‘s initiatives in corporate social responsibility.
42 March 31,2007 have been awarded the ICAI awards for excellence in financial reporting.
The Human Resource Management at BSE has won the Asia-Pacific HRM awards for its efforts in employer branding through talent management at work, health management at work and excellence in HR through technology.
Drawing from its rich past and its equally robust performance in the recent times, BSE will continue to remain an icon in the Indian Capital Market.
2.8.5 Index Closure Algorithm
The closing SENSEX on any trading day is computed taking the weighted average of all the trades on SENSEX constituents in the last 30 minutes of trading session. If a SENSEX constituent has not traded in the last 30 minutes, the last traded price is taken for computation of the Index closure. If a SENSEX constituent has not traded at all in a day, then its last day's closing price is taken for computation of Index closure. The use of Index Closure Algorithm prevents any intentional manipulation of the closing index value.
2.8.6 Maintenance of SENSEX
One of the important aspects of maintaining continuity with the past is to update the base year average. The base year value adjustment ensures that replacement of stocks in Index, additional issue of capital and other corporate announcements like 'rights issue' etc. do not destroy the historical value of the index. The beauty of maintenance lies in the fact that adjustments for corporate actions in the Index should not affect the index values. The BSE Index Cell does the day-to-day maintenance of the index within the broad index policy framework set by the BSE Index Committee. The BSE Index Cell ensures that SENSEX and all the other BSE indices maintain their benchmark properties by striking a delicate balance between frequent replacements in index and maintaining its historical continuity. The BSE Index Committee comprises of capital market expert, fund managers, market participants and members of the BSE Governing Board.
43 2.8.7 On-Line Computation of the Index
During trading hours, value of the Index is calculated and disseminated on real time basis. This is done automatically on the basis of prices at which trades in Index constituents are executed.
2.8.8 Adjustment for Bonus, Rights and Newly Issued Capital
SENSEX calculation needs to be adjusted for issue of Bonus or Rights shares If no adjustments were made, a discontinuity would arise between the current value of the index and its previous value despite the non-occurrence of any economic activity of substance. At the BSE Index Cell, the base value is adjusted, which is used to alter market capitalization of the component stocks to arrive at the SENSEX value. The BSE Index Cell keeps a close watch on the events that might affect the index on a regular basis and carries out daily maintenance of all the 19 Indices.
2.8.8.1 Adjustments for Rights Issues
When a company, included in the compilation of the index, issues right shares, the free-float market capitalization of that company is increased by the number of additional shares issued based on the theoretical (ex-right) price. An offsetting or proportionate adjustment is then made to the Base Market capitalization.
2.8.8.2 Adjustments for Bonus Issue
When a company, included in the compilation of the index, issues bonus shares, the market capitalization of that company does not undergo any change. Therefore, there is no change in the Base Market capitalization, only the 'number of shares' in the formula is updated.
2.8.8.3 Other Issues Base
Market capitalization adjustment is required when new shares are issued by way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-back of shares, corporate restructuring etc.
44 2.8.9 Listing Categories
Before badla was resumed in 1996, there were only two categories of securities listed on the BSE the specified group of shares comprising. The securities in which carry forward deals were allowed and the cash group shares in which no carry forward deals were permitted. Later, it was observed that the facility of carry forward was not being used in all the 94 scrips in the specified group. Hence, after badla was resumed the size of the specified group was reduced to 32 scrips on 3 April 1996. The BSE later decided to regroup the existing A and B group shares into three categories. The BSE delisted 637 companies for a period of 3 years during 2004-05 for non-compliance of listing agreements.
A Group: This group consists of large stock with turnover and high floating stock, with large market capitalization. In other words, scrips with more liquidity and high networth are included in this group. At present, there are 150 scrips in this group. B1 Group: This group includes scrips of quality companies with equity above Rs. 3 crore, with high growth potential and trading frequency No. carry forward facility was allowed in this group in June 2000, there were 1.803 scrips in this group.
B2 Group: Scrips in this group were just like those of B1 but with fortnightly settlement. However in September 1996, the BSE introduced weekly settlement for all scrips listed on the exchange thus doing away with the distinction between the B1 and B2 groups On June 2000, there were 3219 scrips in this group.
Z Group: Subsequently a Z group was introduced in 1999 with scrips of companies that do not meet the rules, regulations and stipulations laid down by the exchange. It is a buyer beware company. These are some 300 scrips in the group. All Z category stocks result in delivers.
F Group: A new ‗F‘ group pertaining to debt market segment was started with effect from 9 September 1996.
S Group: The BSE reduced post-public issue capital base requirement from Rs.10 crore to Rs.3 crore to attract listing by companies with a smaller capital base. It also
45 started a new trading segment small cap stock segment known as the ‗S‘ segment. Corporate with minimum turnover of an equal amount would be eligible to list scrips on this segment. In addition, stocks listed on the regional exchanges would also be able to list on the, ‘S‘ segment, subject to meeting certain criteria.
2.8.10 Base Market capitalization Adjustment
The formula for adjusting the Base Market capitalization is as follows: New Base Market Capitalization (NBMC)
New Market capitalization NBMC = Old Base Market capitalization x ——————————— Old Market capitalization To illustrate, suppose a company issues right shares which increases the market capitalization of the shares of that company by say, Rs.100 crores. The existing Base Market capitalization (Old Base Market capitalization), say, is Rs.2450 crores and the aggregate market capitalization of all the shares included in the index before the right issue is made is, say Rs.4781 crore. The "New Base Market capitalization" will then be:
2450x (4781+100)
_____________________ = Rs.2501.24 crores 4781
This figure of Rs. 2501.24 crore will be used as the Base Market capitalization for calculating the index number from then onwards till the next base change becomes necessary.
Index Review Frequency
The BSE Index Committee meets every quarter to discuss index related issues. In case of a revision in the Index constituents, the announcement of the incoming and outgoing scrips is made six weeks in advance of the actual implementation of the revision of the Index.
2.9
STOCK MARKET INDEX
The stock market index is the most important indices of all as it measures overall market sentiment through a set of stocks that representative of the market. The stock
46 market index is a barometer of the market behavior. It reflects direction and indicates day-to-day fluctuations in stock prices. The market index reflects expectations about the behavior of the economy as a whole. It is a precursor of economic cycles. The function of a stock index is to provide investors with information regarding the average share price in the market. An ideal index must represent changes in the prices of the scrips and reflect price movements of typical shares for better market representation. Stock index is a barometer of a nation‘s economic health as market prices reflect expectations about the economy‘s performance. Stock indices termed as leading economic as they indicate what is going to happen in the economy in the future. The returns generated in the stock market are based on future expectations. A good market index incorporates a set of scrips which have high market capitalization and high liquidity. Market capitalization is the sum of the market value of all the stocks included in the index. The market value is derived by multiplying the price of the share outstanding. In other words, the bid-ask spread is minimum. The index on a day is calculated as the percentage of the aggregate market value of the set of scrips incorporated in the index on that day to the average market value of the same scrips during the base period.
2.9.1 Definition of an Index
A price index is such as the stock market price of the individual securities in the market. It reflects the overall price or return movements of a group of securities. Movements in an index are determined by sample, weighting and computational procedure. Sample is normally generated by random selection or try a non random selection technique designed to incorporate desired characteristics are used to select sample shares rather than by completely random selection. Major criteria for selection are market activity, due representation to various industrial groups and to major stock exchanges.
2.9.2 Global Stock Market Indices
2.9.2.1 The Dow Jones Industrial average’s
It is the most widely watched and quoted index because of its long existence. The Dow has 30 constituents and it follows the methodology of price based weighted.
47 Changes to stocks included in the Dow are infrequent three stocks were added/dropped in 1991, four in 1997 and four in 1999. The addition of Microsoft and Intel in 1999 was the first inclusion of Nasdaq market stocks to the Dow 30.
2.9.2.2 The Nasdaq composite index
The index is the market capitalization weighted of prices for all the stocks listed in the Nasdaq stock market. The Nasdaq composite began on 8 February 1971, with a base of 100.
2.9.2.3 The Nasdaq 100 index
Nasdaq 100 comprises the largest computer, software and telecom stocks by market capitalization on the Nasdaq. For a company to be included in the Nasdaq 100, it must have a minimum average trading volume of 1,00,000 shares per day and must have been trading on a major exchange for at least a year or two.
2.9.2.4 The S & P 500 index
This index comprises 500 biggest publicly traded companies in the US by market capitalization. Most money managers treat the S & P 500 as a proxy for the US stock market. The S & P 500 tries to cover all major areas of US economy. To be included a company must be profitable, the prospective company must not be closely hold and must have a large trading volume for its shares.
2.9.2.5 The FTSE 100
The FTSE 100 consists of the largest 100 companies by full market. Value listed on the London Stock Exchange. The FTSE 100 is the benchmark index to indicate the performance of the European market. It is a market capitalization weighted index that also considers the free float weighted of individual stocks before including them in the index.
2.9.2.6 The MSCI Indices
Include the MSCIEAFE (Europe, Australia and Far East), MSCI Europe, MSCI world, MSCI (EMF), and MSCI Pacific Basin Indices.
48 The MSCI world Index is a free float adjusted market capitalization index that is designed to measure global developed market equity performance. As of April 2002, the MSCI world Index consisted of the MSCI world Index consisted of the following 23 developed market country indices:
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Singapore, Portugal, Spain, Sweden, Switzerland, United Kingdom and the United States of America.
2.9.3 Methodology for Calculating The Index 2.9.3.1 Price Weighted Index
In this method the price of each stock in the index is summed up which is then equated to an index starting value. An arbitrary date is set as the base and the Laspeyer‘s Price Index which measures price changes against a fixed base period quantity weight is used. In case of a stock split, the market price of the stock falls and these results in less weighted in the index. The Dow Jones Industrial Average and Nikkie 225 are price-weighted indices.
2.9.3.2 Equal Weighting
In this method each stock‘s percentage weight in the index is equal and hence, all stocks have an equal influence on the index movement. The value line index at Kansas City Board of Trade (KCBT) is an equal weighted index.
2.9.3.3 Market Capitalization Weighted 2.9.3.3.1 Full Market Capitalization Method
In this method, the number of shares outstanding multiplied by the market price of a company‘s share determines the scrip‘s weighted in the index. The shares with the highest market capitalization would have a higher weighted and would be most influential in this type of index. Eg. S & P 500 Index in USA and S & P CNX Nify in India.
49 2.9.3.3.2 Modified Capitalization Weighted
This method seeks to limit the influence of the largest stocks in the index which otherwise would dominate the entire index. This method sets a limit on the largest stock or a group of stocks. The NASDAQ 100 Index is calculated by using this method.
2.9.4 Free Float Market Capitalization Method 2.9.4.1 Concept
Free float methodology refers to an index construction methodology that takes in to consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in the index. Free float market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market. It generally excludes promoters holding, Strategic holding, government holding and other locked-in-shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a free-float index is reduced to the extent of its readily available shares in the market.
All BSE indices with exception of BSE-PSU index have adopted the free-float methodology
2.9.4.2 Definition of Free Float
Share holding of investor that would not, in the normal course come into the open market for trading are treated as ―Controlling Strategic Holding‖ and hence not included in free float specifically the following categories of holding are generally excluded from the definition of free float.
Shares hold by founders/directors/acquires which has control element.
Shares held by person with ―Controlling Interest‘
50
Holding through the FDI Route.
Strategic Stakes by private corporate bodies/individuals.
Equity held by employee welfare trusts.
Locked-in-shares and shares which not be sold in the open market in normal course.
2.9.4.3 Major Advantages of Free Float Methodology
A Free float index reflects the market trends more rationally as it takes into consideration only those shares that are available for trading in the market. Free float methodology makes the index more broad based by reducing the concentration of top few companies in index.
A free-float index aids both active and passive investing styles. It aids active managers by enabling them to benchmark their fund returns Vis-à-Vis an investible index. This enables an apple-to-apple comparison thereby facilitating better evaluation of performance of active managers.
Free float methodology improves index flexibility in terms of including any stock from the Universe of listed stocks. This improves market coverage and sector coverage of the index. However under the Free-float Methodology since only the free float market capitalization of each company is considered for index calculation, it becomes possible to include such closely held companies in the index while at the same time preventing their undue influence on the index movement.
The free float methodology of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P have adopted the same. MSCI a leading global index provider shifted all its indices to the free-float methodology in 2002, the MSCI India Standard Index which is followed by foreign institutional investors (FIIs) to track Indian equities, is also based on the free float methodology NASDAQ 100, the underlying index to the famous exchange traded fund (ETF)-QQQ is based on the free float methodology.
51 2.9.4.4.1 Determining Free-float Factors of Companies
BSE has designed a Free-float format, which is filled and submitted by all index companies on a quarterly basis. BSE determines the Free-float factor for each company based on the detailed information submitted by the companies in the prescribed format. Free-float factor is a multiple with which the total market capitalization of a company is adjusted to arrive at the Free-float market capitalization. Once the Free-float of a company is determined, it is rounded-off to the higher multiple of 5 and each company is categorized into one of the 20 bands given below. A Free-float factor of say 0.55 means that only 55% of the market capitalization of the company will be considered for index calculation.
Table 2.4 Free-float Bands
% Free-Float Free-Float Factor % Free-Float Free-Float Factor
>0 - 5% 0.05 >50 - 55% 0.55 >5 - 10% 0.10 >55 - 60% 0.60 >10 - 15% 0.15 >60 - 65% 0.65 >15 - 20% 0.20 >65 - 70% 0.70 >20 - 25% 0.25 >70 - 75% 0.75 >25 - 30% 0.30 >75 - 80% 0.80 >30 - 35% 0.35 >80 - 85% 0.85 >35 - 40% 0.40 >85 - 90% 0.90 >40 - 45% 0.45 >90 - 95% 0.95 >45 - 50% 0.50 >95 - 100% 1.00 Source: www.bseindia.com 2.9.5 BSE Indices
For the premier stock exchange that pioneered the securities transaction business in India, over a century of experience is a proud achievement. A lot has changed since 1875 when 318 persons by paying a then princely amount of Re. 1, became members of what today is called Bombay Stock Exchange Limited (BSE). Over the decades, the stock market in the country has passed through good and bad periods. The journey
52 in the 20th century has not been an easy one. Till the decade of eighties, there was no measure or scale that could precisely measure the various ups and downs in the Indian stock market. BSE, in 1986, came out with a Stock Index-SENSEX- that subsequently became the barometer of the Indian stock market.
The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National Index (Base: 1983-84 = 100). It comprised 100 stocks listed at five major stock exchanges in India - Mumbai, Calcutta, Delhi, Ahmadabad and Madras. The BSE National Index was renamed BSE-100 Index from October 14, 1996 and since then, it is being calculated taking into consideration only the prices of stocks listed at BSE. BSE launched the dollar-linked version of BSE-100 index on May 22, 2006.
With a view to provide a better representation of the increasing number of listed companies, larger market capitalization and the new industry sectors, BSE launched on 27th May, 1994 two new index series viz., the 'BSE-200' and the 'DOLLEX-200'. Since then, BSE has come a long way in attuning itself to the varied needs of investors and market participants. In order to fulfill the need for still broader, segment-specific and sector-specific indices, BSE has continuously been increasing the range of its indices. BSE-500 Index and 5 sectorial indices were launched in 1999. In 2001, BSE launched BSE-PSU Index, DOLLEX-30 and the country's first free-float based index - the BSE TEC Index. Over the years, BSE shifted all its indices to the free-float methodology.
BSE disseminates information on the Price-Earnings Ratio, the Price to Book Value Ratio and the Dividend Yield Percentage on day-to-day basis of all its major indices. The values of all BSE indices are updated on real time basis during market hours and displayed through the BOLT system, BSE website and news wire agencies.
All BSE Indices are reviewed periodically by the BSE Index Committee. This Committee which comprises eminent independent finance professionals frames the broad policy guidelines for the development and maintenance of all BSE indices. The BSE Index Cell carries out the day-to-day maintenance of all indices and conducts research on development of new indices.
53 2.9.5.1 BSE-100 Index
A broad-based index, the BSE-100 was formerly known as the BSE National index. This Index has 1983-84 as the base year and was launched in 1989. In line with the shift of the BSE Indices to the globally accepted Free-Float methodology, BSE-100 was shifted to Free-Float methodology effective from April 5, 2004. The method of computation of Free-Float index and determination of free-float factors is similar to the methodology for SENSEX.
Table 2.5 Index Specification
Base Year 1983-84
Base Index Value 100
Date of Launch 3-Jan-89
Method of calculation Launched on full market capitalization method and effective April 05, 2004, calculation method shifted to free-float market capitalization.
Number of scrips 100
Index calculation frequency Real Time Source: www.bseindia.com
2.9.5.2 Base Year
The financial year 1983-84 has been chosen as the base year. The price stability during that year and proximity to the index series were the main consideration for choice of 1983-84 as the base year. The base value was fixed at 100 points.
2.9.5.3 Dollex-100
BSE also calculates a dollar-linked version of SENSEX and historical values of this index are available since its inception.
2.9.5.4 BSE-100 index - Scrip Selection Criteria
The general guidelines for selection of constituents in BSE-100 are as follows:
54 in the last three months. Exceptions can be made for extreme reasons like scrip suspension etc.
Final Rank: The scrip should figure in the top 200 companies listed by final rank. The final rank is arrived at by assigning 75% weighted to the rank on the basis of three-month average full market capitalization and 25% weighted to the liquidity rank based on three-month average daily turnover & three-month average impact cost. Industry/Sector Representation: Scrip selection would generally take into account a balanced sectorial representation of the listed companies in the universe of BSE. Track Record: In the opinion of the BSE Index Committee, the company should have an acceptable track record.
2.10
STOCK MARKET VOLATILITY
2.10.1 Meaning
Volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices. An implied volatility is derived from the market price of a market traded derivative (in particular an option). Volatility does not measure the direction of price changes, merely their dispersion. This is because when calculating standard deviation (or variance), all differences are squared, so that negative and positive differences are combined into one quantity. Two instruments with different volatilities may have the same expected return, but the instrument with higher volatility will have larger swings in values over a given period of time.
For example, a lower volatility stock may have an expected (average) return of 7%, with annual volatility of 5%. This would indicate returns from approximately negative 3% to positive 17% most of the time (19 times out of 20, or 95% via a two standard deviation rule). A higher volatility stock, with the same expected return of 7% but with annual volatility of 20%, would indicate returns from approximately negative 33% to positive 47% most of the time (19 times out of 20, or 95%). These estimates assume a normal distribution; in reality stocks are found to be leptokurtotic.
