A stock market index is a number that indicates the relative level of prices or value of securities in a market on a particular day compared with a base-day figure, which is usually 100 or 1000.

There are many different ways of constructing an index. One of the most common methods is illustrated by the following simple example.

The values of a market portfolio at the close of trading on Day 1 and Day 2 are recorded below:

We take Day 1 as the base day. The index on that day will be taken as a standard. The value assigned to the base day index is 1000 in this example. On Day 2 the value of the portfolio has changed from Tk 20,000 to Tk 30,000, a 50% increase. Therefore, the value of the index on Day 2 will change to indicate a corresponding 50% increase in market value. The computation follows the procedure below:

The above illustration only serves as an introduction to how a particular index is constructed. The daily computation of an index is more involved especially when there are changes in market capitalization of constituent stocks, e.g., rights offers, stock dividend etc.

The primary objective of constructing market indices is to measure the performance of the market. The indices provide vital information about the current and historical behavior of the market.

Stock market indices differ from one another basically in their sampling and/or weighting methods.

There is some market indices that are composed of all stocks listed in a market, e.g., the American Stock Market Index and the Hong Kong Stock Exchange All-Ordinaries Index.

In general, an index based on a larger percentage of the total number of listed stocks will be more representative that one based on a smaller percentage. Although an index that consists of all listed stocks can be considered as more representative, a number of stocks may have very few transactions, the quoted price of these stocks may not reflect their true market value.

An index may still be highly representative even if it consists of only a relatively small percentage of the total number of stocks. Here, the sample selection process plays an important role. Most of well-known stock market indices of the major stock markets in developed countries are still considered as highly representative since their constituent stocks comprise a high percentage of total value of the market. For example, the Hang Seng Index (Hong Kong) is composed of 33 constituent stocks comprising approximately 70% of total value. FOX index (Finland) is composed of 25 most traded shares which is correspond to roughly 80% of the total market value and ATX 50 (Australia) comprises 84% of the capitalization and 97% of the turnover of all Australian stocks.

Value-weighted method may be considered as a most appropriate method than others. For a value-weighted index, the weight of each constituent stock is proportional to its market share in terms of capitalization. We can assume that the amount of money invested in each of the constituent stocks is proportional to its percentage of the total value of all constituent stocks. Examples include all major stock market indices of Hong Kong, London and many others.

The computation of a value-weighted index is similar to that of a Laspayres index. It is useful to think in terms of evaluating the performance of a portfolio of securities. Some adjustments need to be made due to changes in market capitalization of the portfolio's constituent stocks. The adjustment procedures are discussed below.

To make our computation simple, we need to keep the number of constituent stocks small. Let us assume that the index is composed of only three stocks: A, B and C.

The market value of each stock at closing is given by the product of the number of shares outstanding and the closing price. For stock A, for instance, it is 20 shares times Tk.10 which yields Tk.200. The aggregate market value (AMV) of all constituent stocks is the sum of the market value of each stock. The AMV of day 1 is Tk.290. Day 1 will be taken as the base day on which the index is set at 1000.

As there is no change in capitalization, no adjustment is needed on Day 2. The AMV is equal to Tk.295. The computation of the index on Day 2 follows the procedure below:

It should be clear that the change in the index value shows the relative change in the aggregate market value of the constituent stocks. There is a 1.72% (={1017.24/1000}-1) increase in AMV on Day 2 relative to Day 1 (the base day).

Adjustments need to be made from time to time as a result of changes in capitalization of the constituent stocks. They are discussed in detail below:

Company A issues bonus shares. Its shares are to be traded ex-bonus at the ratio of "1 for 2", i.e., one share will be given as bonus for every 2 shares held. This issue of shares is going to change the total number of shares outstanding on Day 3. The adjustment is shown below:

Stock C is planning rights issues at the ratio of "2 for 5" at Tk.1.50 per share. The offers expires on Day 4 (i.e. ex-rights). As mentioned earlier, it is useful to treat the constituent stocks as a portfolio held by an investor. In the computation of the index on Day 4, the investor is assumed to exercise the rights. Therefore, the new number of shares outstanding for stocks C is given by:

Since all rights are exercised, capitalization adjustment needs to be made on Day 3. The number of shares outstanding increases by 4. This will cause an increase in capitalization by Tk.6 (=4*1.50) on Day 3. The adjusted AMV on Day 3 in the index computation on Day 4 will be:

The index dropped from 1068.96 to 1028.37. This can be interpreted as a 3.8% decrease in AMV.

Stock B is replaced by stock D, which has a closing price at Tk.11.5 on Day 4 and its number of shares outstanding is 20.

The adjustment on Day 4's AMV in computing Day 5's Index follows a procedure as if the stock replacement had taken place on Day 4. The adjusted AMV on Day 4 is given as:

Stock E is added to the index as a constituent stock on Day 6. Stock E has a closing price of Tk.4 and the number of shares outstanding is 40 on Day 5.

Since the number of stocks has changed, we need to compute the adjusted AMV for Day 5 in computing Day 6's index. Day 5's adjusted AMV will be equal to the original AMV plus the market value of stock E on Day 5. This is equal to Tk.520 + 160 = 680.

Any new issue (IPO) should not be considered in the computation of index for x days from the date of first trade. x should be double digit parameter same for all scrips. Ex. x = 4, x = 5 or x = 6 days.

Stock C is deleted from the index's constituent stocks. The new total number of stocks is reduced to 3.

The adjusted AMV on Day 6 will be a reduction by the amount of market value of stock C on Day 6. Day 6's adjusted AMV will be equal to Tk 709.2 - 67.2 = 642.

Cash dividends of Tk .50 per share are declared for stock E and Day 8 is to be ex-dividend.

Note that the price of stock E drops. This is a normal phenomenon as a stock goes ex-dividend.

For Example: On Day-8 Trading Session at a particular time the position of market is like this and the value of index is 1157.09.

		 666
Day 8's index = ----- * 1174.89  (Here 660 is AMV of Previous day
		 660	         & 1174.89 is Index of Previous day)
		
Index Value   = 1185.57

CSE ALL SHARE PRICE INDEX

A good market representative index should involve:

Scientific calculation formulas with clear adjustment procedure

Logical scrip selection criteria

Distinct base date

Meaningful base value

The only index the CSE has been maintaining since 10^th October 1995 is a ALL SHARE PRICE INDEX using Chained Paasche method. It faces question of clarity. This index was subject to unusual ups and downs and without a distinct base value. Therefore in need of a clean slate CSE finds the date 1 January 2000 is the best date to start new Indices:

An All Share Price Index with new formula and base date 30^th December 1999 (the last day of the year) and new base index of thousand (to mark the millenium) will replace the existing one and

A completely new Selective Index incorporating 30 scrips with base date 30^th December 1999 and base index 1000.

We have studied index of a number of bourses and found that the Laspayers Method to calculate index is regarded as the most transparent and scientific method. The method is described below in this write-up.

The following conditions will be followed while calculating the All Share Price Index:

All Share Price Index does not necessarily mean that all the listed stocks should be considered for calculating the index. Inactive stocks not being traded for consecutive six months will not be considered in the calculation.

Only the active scrips will be considered for calculating the index.

Mutual Funds and Debt securities will not be considered in calculating index.

A newly listed scrip will be included in the index after five consecutive trading days.

Only normal trades should be considered in calculating index.

All share price index will be calculated only once in a day – after the trading hour in the on line system.

No changes in number of shares will be allowed during VECTOR session.

Index committee will review the index – its criteria, performance, calculation method after every six month.

Index Base Date is 30^th December 1999

Base Day index 1000

CSE SELECTIVE INDEX (CSE - 30)

At the beginning of new millennium a selective Index will be introduced, which is found to be very popular in almost all the developed exchanges worldwide. Here the selection criteria play a very important role in forming an index.

Criteria for a Selective Index

It provides a discussion about the important criterion for an index, which is to be used as a benchmark of performance. The criterion is that the movement of the index fully represents the aggregate movement of the index's constituent assets and that the index's returns are realizable by an investor who has held a portfolio identical to the asset mix of the index. Value-Weighted Index satisfies the above criterion.

Selection of stocks for the benchmark index should be such that it represents the whole market. In addition it will be guaranteed that the constituent stocks have high percentage coverage of the market in terms of market value. This will make it difficult if not possible for a few investors to manipulate the movement of the index.

CRITERIA FOR CSE-30 INDEX

(After revision in the Listing & Index Committee Meeting held on 28^th Apr 2009)

Two layer methods are followed for selection of listed companies in the CSE-30 Index. In the first layer method, basic criteria are considered for primary selection.

BASIC CRITERIA

1. Must be listed with the Chittagong Stock Exchange Limited.

2. In case of IPO/New Issue, this should be on listing either with DSE or CSE for a minimum period of 2 years or remained in Commercial Production in Bangladesh for the minimum same period prior to its listing.

3. Companies that did not hold their Annual General Meetings regularly will not be considered.

4. Minimum market capitalization must be Tk. 200 million and at least two times of paid-up capital.

5. Must have at least 20% free floating share capital. Free floating share capital shall mean the share capital which will exclude Govt’s holding (other than ICB), Sponsors/Directors & their Associates’ holding plus other locked-in portions.

6. Must have positive revenue reserve/ retained earnings.

7. Must be traded for at least 50% trading days of the six monthly review period.

8. Paid dividend in any of the last 2 years.

9. Company having negative Earning Per Share (EPS) for last two consecutive years will not be considered.

10. Company falling under settlement category ‘Z’ will not be considered.

11. Financial Institution falling under the problem list of Bangladesh Bank will not be considered provided such information is available from an acceptable source.

12. Company failing to pay the listing fees and/or penalty imposed under the Listing Regulations of CSE for a period of 2 years will not be considered.

13. At least one company from each sector having minimum seven companies will be taken in the index if the scrip satisfies the above criteria and achieves the minimum point (50 points) as evaluated on the basis of the following Selection Criteria. The sector having less than seven companies will be considered to be a part of Miscellaneous Sector.

On being qualified on the basis of the Basic Criteria, the companies are required to meet the following further Selection Criteria to have the final berth in CSE-30 Index.

SELECTION CRITERIA

1. Higher Net Assets Value (NAV) per share

2. Higher rate of Earning Per Share (EPS)

3. Higher rate of Dividend

4. Lower Price Earning (PE) Ratio

5. Higher Dividend Yield (DY)

6. Higher rate of free floating in equity

7. Larger number of shareholders

8. Higher liquidity in terms of trading day

9. Higher liquidity in terms of number of contract

10. Longer duration of continuous remaining in the CSE-30 Index

11. Regular payment of listing fees

CSE Selective Categories Index - CSCX

Chittagong Stock Exchange (CSE) launched a new index named CSCX (CSE Selective Categories' Index) comprised A, B & G category companies from 14th February 2004 to replace the earlier CSE Trade Volume Weighted Index.

The Base Date of this index is 15th April 2001 (when A, B & Z category were introduced) and Base Value is set to 1000.

The new index includes all but not the Z category companies. This also excludes the companies/scrips which are debt securities, mutual funds, suspended for indifinte period and non-traded for preceding six months of review meeting. The index will be reviewed in the Index Committee Meeting after every six months like other two indices of CSE.

This index will be disseminated on line to all the Brokers' Work Stations (BWSs) during trading sessions and after every three minutes the index value will be refreshed.

According to the said bases of this index the value of the index on 11th February 2004 stands at 1165.3754. A graphical view from its inception i.e. 15th April 2001 is as below:

CSE Selective Categories Index (CSCX)

The construction principle of this index based on Laspeyres method like other two CSE indices, CSE All Share Price Index and CSE-30 Index. It may be mentioned here that the base value of these two indices was also set to 1000 with a base date 30th December 1999. The current values (as on 11th Feruary 2004) of CSE All Share Price Index and CSE-30 Index are 1601.54 and 1483.60 respectively.

The page last saved on: August 26, 2009

Stock	Shares Outstanding	Closing Price	Market Value
A	30	7	210
B	5	9	45
C	10	5.5	55
Aggregate Market Value (AMV)=310

Stock	Shares Outstanding	Closing Price	Market Value
A	30	6.5	195
B	5	9.2	46
C	14	4.5	63
Aggregate Market Value (AMV)=304

Stock	Shares Outstanding	Closing Price	Market Value
A	30	6.5	195
D	20	11.5	230
C	14	4.5	63
Aggregate Market Value (AMV) = 488

Stock	Shares Outstanding	Closing Price	Market Value
A	30	7.2	216
C	14	4.8	67.2
D	20	12.3	246
E	40	4.5	180
Aggregate Market Value (AMV) = 709.2

Stock	Shares Outstanding	Closing Price	Market Value
A	30	7	210
D	20	12.5	250
E	40	5	200
Aggregate Market Value (AMV) = 660

	Value of portfolio	Index
DAY 1 (base day)	Tk 20,000	1000
Day 2	Tk 30,000	1500