Stock Market Index

Definition A stock market index is a hypothetical basket of securities designed to track market changes. The most widely followed US stock market indexes are: DJIA S&P 500 NASDAQ Composite Important international stock market indexes are the Nikkei 225 (Japan)

Index differ from one another with respect to: The securities included in the index and The method used in calculating the value of index

Types Price-Weighted Index Value –Weighted Index Equal- Weighted Geometric Mean

Price-Weighted Index Definition: Suppose there are two stocks A & B Average = A+B / d (Where d is divisor) Formula: I1 = I o * AP1 / APo Title NO Price To Price T1 A 1500 10 13 B 2000 20 22

Adjusting the Divisor with stock Split At T1 B splits (two of one) Number of share has increased To Price: 20 T1 Price: 11 -------- (*2)= 22

Value –Weighted Index Definition: Suppose there are two stocks A & B Formula: I1 = I o * MV1 / MV0 Title No. of shares Price at To Price at T1 A 1500 10 13 B 2000 20 22

Equal–Weighted Index Definition: Suppose there are two stocks A & B This index is computed by multiplying the level of the index on the previous day by the arithmetic mean of the daily price relatives of the relevant stocks in the index. Daily Price relatives Today’s price dived by yesterday’s price Suppose there are two stocks A & B Title NO Price To Price T1 A 1500 10 13 B 2000 20 22

Calculation Suppose there are two stocks A & B A: 13 / 10 = 1.3 Now calculate the arithmetic mean 1.3 + 1.1 / 2 = 1.20 Title NO Price To Price T1 A 1500 10 13 B 2000 20 22

*The value line Composite (Arithmetic) index, based Consider the value of index on day To =100 Then , I1 = Arithmetic Mean * I0 I1 = 1.20 * 100 = 120 *The value line Composite (Arithmetic) index, based on more than 1500 stocks is prepared in this manner

Geometric Mean Index Definition: Suppose there are two stocks A & B This index is computed by multiplying the level of the index on the previous day by the geometric mean of the daily price relatives of the relevant stocks in the index. Suppose there are two stocks A & B

Geometric Mean Index (1.3 * 1.1) = 1.1958 Definition: Suppose there are two stocks A & B A: 13 / 10 = 1.3 B: 22 / 20 = 1.1 Now calculate the Geometric mean (1.3 * 1.1) = 1.1958 Title NO Price To Price T1 A 1500 10 13 B 2000 20 22 1/2

Consider the value of index on day To =100 Then , I1 = I0 * Geometric mean I1 = 100 * 1.1958 = 119.58

Comparing the Indices P-W I = 16.67 % V-W I = 15.45 % E-W I = 20 % GM = 19.58 %

Stock Split A corporate action in which a company's existing shares are divided into multiple shares. The number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts. Because no real value has been added as a result of the split. In the U.K., a stock split is referred to as: "scrip issue", "bonus issue", "capitalization issue" or "free issue".

For example, in a 2-for-1 split, each stockholder receives an additional share for each share he or she holds. Why stock splits are performed? A company's share price has grown so high that to many investors, the shares are too expensive to buy in round lots. For example, if a XYZ Corp.'s shares were worth $1,000 each Investors would need to purchase $100,000 in order to own 100 shares. If each share was worth $10, investors would only need to pay $1,000 to own 100 shares.