Friday, 5 October 2012

How Is Sensex Calculated?

The Sensex was initially calculated based on the “Full Market Capitalization” methodology but was shifted to the “Free-float methodology” with effect from September 1, 2003.

As per the Free-float Market Capitalization methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float methodology.

The calculation of Sensex involves the following steps broadly:

1. Calculate the market capitalization of each of the 30 companies in the index by multiplying their stock price by the number of shares issued by that company.

2. Multiply the market capitalization by the free-float factor to determine the free-float market capitalization.
Free-float factor of a company is a multiple with which the total market capitalization of that company is adjusted to arrive at its Free-float market capitalization. It is determined by BSE based on the information submitted by the companies. The value of Free-float factor lies between 0.05 and 1.00. 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
3.  Divide the free-float market capitalization of the Index constituents by a number called the Index Divisor. The Divisor is the only link to the original base period value of the Sensex. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions.

The base period of Sensex is 1978-79 and the base value is 100 index points.

An Example

Suppose the Index consists of only 2 stocks: Stock X and Stock Y. Then, the table below shows the SENSEX calculation:

Understanding the result:

Step 1 and Step 2 are self-explanatory. Lets understand the Step 3.

The year 1978-79 is considered the base year of the index with a value set to 100. What this means is that if at that time the market capitalization of the stocks that comprised the index was 60,000, then the index-value at that time would be 100. So, using simple unitary method, we can find the corresponding present value of the SENSEX.

The factor 100/60000 is called the index divisor.

What are the 30-benchmark stocks?

The 30-benchmark stocks are given below, along with their Free-float factor:

Note : This above list keeps on changing from time to time, based on the various guidelines that BSE follows for the selection of benchmark stocks.

Thursday, 10 May 2012

ROE (Return On Equity)

A small try on a vital aspect of finance not only for the shareholders but also for the students as well i.e. Return on Equity (ROE) which is a measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested. 

ROE is calculated as:

The ROE is useful for comparing the profitability of a company to that of other firms in the same industry. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: 

Return on common equity (ROCE) = 

Net income - preferred dividends / Common equity

Wednesday, 18 April 2012

Advanced Trailing Stop Loss Methods

In this article we will look at taking this one step further and using stop losses not just to limit risk and lock in profits but also to enable you to produce even more profit but increasing the level of risk you are in the trade at the appropriate time. This does not mean that you trade at a more risky level – remember this is a cardinal sin for traders. It does mean, however, that you take on more risk at a time in a trade that is already in profit. This way, you can be assured that the trade will never lose you money but you will be able to give it more freedom to develop without being stopped out too early!

Non-fixed Average True Range (ATR) Based Stop Losses

The average true range is an indicator that takes into account the volatility of a stock. The more volatile a stock, the more room is required for a stop to prevent the trade from being stopped out too early intraday. ATR takes into account the volatility of a stock unlike other more basic forms of stop loss such as a trailing percentage or point stop loss. For a more detailed discussion of ATR (and other indicators)
As an example, it is possible for you to set your initial stop loss to 2*ATR below the low of the day and then increase the stop loss to, for example, 3*ATR once the stock is in profit. This will allow your trade a little more room to breathe with very little chance of losing any money.

The chart below demonstrates this principle: 

The red line is the stop loss that is not based on the traditional approach of trailing behind a fixed ATR while the blue line is a stop loss that is based on a fixed ATR. The trade was entered on the 19th September and it can be seen that, in this case, the blue stop loss is activated much quicker than the red stop loss. In other words, in this case, a non-fixed ATR produced much more profit than the fixed ATR based stop loss.

Mixed Stop Loss Methods

It is also perfectly possible for you to mix the initial stop loss method with a totally different method of stop loss calculation later on. For example, the initial stop loss can be based on a 2*ATR and then be trailed based on the low of the past “X” number of days. So, if we take X to be 40 days, then as soon as the low of the past 40 days is greater than the initial stop loss, the stop loss is trailed to the newly calculated method and so on.


The above state two methods of advanced stop loss calculation. There are a number of different other methods and you will need to find a method that is suitable for you. Remember, there is no method that is ideal in all situations and you may find that one method may be better in one stock and not another. It is therefore important that you back test your method on different stocks to ensure that the method, in general, works. Above all, keep it simple and manageable. Without sounding too harsh remember the following pneumonic - KISS – Keep It Simple Stupid!

Monday, 16 April 2012

Intra-Day Trading v/s Delivery Based Trading

While doing stock market investment you can trade in two different ways. You can either do intraday trading or can opt for delivery based investment. Intraday trading is typically completed within a day that means you have sell the stocks that you have purchased that day before the closing of the exchange. Even if you do not sell the stocks by yourself, they will automatically square off before the closing of the exchange. In case of delivery based investment or long term investment, you can sell the stocks as and when you wish to sell or buy them. Both these types of stock trading have its pros and cons.

Advantages of Intra-Day Trading

  • In day trading you can buy stocks without paying for the full price of the stocks. The market makers allow you pay only a part of the price to hold the shares. So, you can gain more by investing less.
  • In day trading you can always short sell the stocks that mean you can always sell the stocks before buying them and then buy the stocks before the closing of the market. This is one benefit that can give you profit even when the price of the stock is sure to fall.
  • The brokerage of the intraday trading is always lower than the delivery trading.
  • In day trading you are getting the profit on the very day. So, you investment is for a few hours only. Therefore, even if the stock price rises, a little your profit percentage is significant.
  • You get back the money each day after the market closes and hence you can always start afresh the next morning.

Disadvantages of Intra-Day Trading

  •  The biggest disadvantage of intraday trading is the time frame. You have to sell the stocks within a day. So, if the stock loses price you are sure to lose money

Advantages of Delivery Based Trading

  •  With delivery based trading, you can always hold a stock till it reaches the expected price.
  •  The long term investment can always get you dividend.
  •  You can also benefit from split shares, bonus stocks and other benefits that the company announces.

Disadvantage of Delivery Based Trading

  •  In delivery trading you pay higher brokerage.
  •  Your investment is always susceptible to market crashes, business cycles and other factors.
  •  Whatever it is, as an investor, you should know which stock is for intra-day trading and which one is to hold as long term investment.

Wednesday, 11 April 2012

What is the opening price of a stock? Is it same with the closing price of the previous day????????

That’s like asking how long a piece of string is. The answer is as Chandu Sir says ‘it depends.’

Once a stock moves out of the IPO stage and into the open market, there are a number of factors that go into setting the price.

Opening Price

For example, Infosys closes on Tuesday at 2776.80; what will it open at on Wednesday morning?

The answer is
who knows. Most likely, it will open somewhere around 2776.80; but as you can see over here the current day opening price is 2765.00 which is less than 11.80 from the previous day closing price. Any number of things might cause it to open higher or lower. Before the market opens on Wednesday:

  • FDI in retail Sector
  • Budget of 2012-13
  • Monetary policy set by RBI

All of these circumstances and many others could influence the price up or down. In the end, it remains a question of what a buyer is willing to pay and a seller is willing to take.

The swirl of market, political, and industry news influences whether there are more buyers or sellers for a particular stock in the market at any one time.

Tuesday, 10 April 2012

Have Some Fun!

Murphy's Laws:

What do both stock markets and women have in common?
They both go Up and Down...

Stock Market Day Trader:

The Pessimist sees the glass as half empty.
The Optimist sees the glass half full.
The Stock Market Day Trader JUST ADDS WHISKEY ...

A Stockbroker:

There was a tremendous turnaround in the market today:
A stockbrocker who jumped out of a window on the twelfth floor, saw a computer screen on the seventh floor and did a U-turn.

Stockbroker eligibility:

QUESTION: When does a person decide to become a stockbroker?
ANSWER: When he realizes he doesn't have the charisma to succeed as an undertaker.