INDEX CALCULATION

The stock exchange index is a relative measure of the performance of all or a numer of stocks that are traded on a stock exchange. it incorporates the return on stocks, their volumes traded and the shares outstanding. there can be a number of indices relating to a single stock exchange that incorprates the returns on a number of companies. they can also be differentiated on the basis of the return on different industries.

A stock index is generally a portfolio of stocks, bonds or ot er kinds of in!est"ents # ic are $sed to represent eit er seg"ents of an exc ange or t e # ole exc ange% One of t e "ost co""on #ays to $nderstand a stock index is to a!e a look at t e co"position of t e stocks it represents% &enerally, t e set of r$les re'$ire t e stocks to satisfy certain criteria, s$c t at()*+

All t e in!est"ents in t e index are s$b,ect to selection% Incl$des calc$lations and r$les for #eig ting of t e index co"ponents% -ro!ides specific instr$ctions for ad,$st"ents to "aintain consistency%

T is really depends on # at kind of stock exc ange yo$.re talking abo$t and # at kind of co"p$tation syste" t at stock exc ange $ses% /or exa"ple, t e Do# 0ones Ind$strial a1g and Nikkei 223 $se t e price4#eig ted index "et od b$t t e "ost co""on type $sed is t e !al$e #eig ted index "et od% T e !al$e4#eig ted index is generated by deri!ing t e initial total "arker !al$e of all stocks $sed in t e index 56kt !al$e 7 No% of s ares o$tstanding 8 c$rrent "arket price9% T en, a ne# "arket !al$e is co"p$ted for all sec$rities in t e index, and t e c$rrent "arket !al$e is co"apred to t e initial :base: "arket !al$e to deter"ine t e percentage of c ange, # ic in t$rn is applied to t e beginning index !al$e%

KSE 100
Executive Summary of CFA Level 1 reading on Security Market Indexes

An index is a measure of the performance of a market Some of the best know indexes include the Dow Jones Industrial Average (DJIA), S&P500, FTSE and Nikkei Indexes can be created for a market segment; for example you can create an index which only tracks small-cap stocks There are three types of stock market indexes Price Weighted Indexes Value Weighted Indexes Unweighted Indexes Price weighted index is calculated by taking the arithmetic mean of all stocks in the index (adjustments are made for stock splits)

DJIA and Nikkei are price weighted indexes You can match the performance of a price weighted index by buying the shares in the index. Value weighted index is based on the relative market value of stocks in the index NASDAQ and KSE100 are value weighted indexes For value weighted indexes a change in high market value shares has a relatively high impact Unweighted index places an equal weight on the returns of all index stocks, regardless of size or market value

Pakistan Context Indexes used in Pakistan include: KSE100, KSE30, LSE25, ISE10 and BRIndex30. The most commonly quoted index is the KSE100; it provides a good indication of how the Pakistan equity market is performing KSE100 is a value weighted index; calculation methodology is exactly as you learned in the CFA curriculum. Base year is 1999 with a base value of 1000 100 stocks in the index are selected based on two fundamental rules Largest market cap stock from each of the 34 KSE sectors The remaining 66 companies are selected based on market cap The KSE100 index captures about 80% of the total market capitalization of firms listed on the KSE KSE100 is reconstituted every six months

Companies on the defaulters counter and/or companies which have been declared nontradable are not considered in the reconstitution

KSE 30
T e ;arac i <tock Exc ange as la$nc ed t e KSE-30 Index #it base !al$e of )=,=== points, for"ally i"ple"ented fro" /riday, <epte"ber ), 2==>% T e "ain feat$re of t is index t at "akes it different fro" ot er indices are+ ;<E4?= index is based only on t e free4float of s ares, rat er t an on t e basis of paid4 $p capital% T e ot er indices in ;arac i <tock Exc ange represents total return of t e "arket% T at is, # en a co"pany anno$nces a di!idend, t e ot er indices at ;<E are not red$ced@ad,$sted for t at a"o$nt of di!idend 5# et er cas or bon$s9%A ereas, ;<E4?= Index is ad,$sted for di!idends and rig t s ares%

Bon$s s are
A bonus share is a free s are of stock gi!en to c$rrent s are olders in a co"pany, based $pon t e n$"ber of s ares t at t e s are older already o#ns% A ile t e iss$e of bon$s s ares increases t e total n$"ber of s ares iss$ed and o#ned, it does not c ange t e !al$e of t e co"pany% Alt o$g t e total n$"ber of iss$ed s ares increases, t e ratio of n$"ber of s ares eld by eac s are older re"ains constant% Cig t s are
Right shares are the shares which are offered by the company to the existing shareholders.Simply stated the existing shareholders have a right to subscribe for the shares which are offered by the company after initial allotment until some special right is reserved for any other person by special resolution in this respect. Section 81 i.e urther issue of capital of companies act 1!"# deals with this and it states that where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares. $redit rating

A credit rating e!al$ates t e credit #ort iness of an iss$er of specific types of debt, specifically, debt iss$ed by a b$siness enterprise s$c as acorporation or a go!ern"ent% It is an e!al$ation "ade by a credit rating agency of t e debt iss$ers likeli ood ofdefa$lt%(?* Credit ratings are deter"ined by credit ratings agencies% T e credit rating represents t e credit rating agency.s e!al$ation of '$alitati!e and '$antitati!e infor"ation for a co"pany or go!ern"entD incl$ding non4p$blic infor"ation obtained by t e credit rating agencies analysts% Credit ratings are not based on "at e"atical for"$las% Instead, credit rating agencies $se t eir ,$dg"ent and experience in deter"ining # at p$blic and pri!ate infor"ation s o$ld be considered in gi!ing a rating to a partic$lar co"pany or go!ern"ent% T e credit rating is $sed by indi!id$als and entities t at p$rc ase t e bonds iss$ed by co"panies and go!ern"ents to deter"ine t e likeli ood t at t e go!ern"ent #ill pay its bond obligations% A poor credit rating indicates a credit rating agency.s opinion t at t e co"pany or go!ern"ent as a ig risk ofdefa$lting, based on t e agency.s analysis of t e entity.s istory and analysis of long ter" econo"ic prospects% Market capitalization Market capitalization 5often market cap9 is a "eas$re"ent of t e !al$e of t e !oting o#ners ip interest t at s are olders old in a b$siness enterprise% It is e'$al to t e s are price ti"es t e n$"ber of s ares o$tstanding 5s ares t at a!e been a$t oriEed, iss$ed, and p$rc ased by in!estors9 of a p$blicly traded co"pany% As o$tstanding stock is bo$g t and sold in p$blic "arkets, capitaliEation co$ld be $sed as a proxy for t e p$blic opinion of a co"pany.s net #ort and is a deter"ining factor in so"e for"s of stock !al$ation% -referred s ares are not incl$ded into t e calc$lation%

6arket capitaliEation represents t e p$blic consens$s on t e !al$e of a co"pany.s e'$ity% In a p$blic corporation, o#ners ip interest is freely bo$g t and sold t ro$g p$rc ases and sales of stock, pro!iding a "arket "ec anis" 5price disco!ery9, # ic deter"ines t e price of t e co"pany.s s ares% 6arket capitaliEation is defined as t e s are price "$ltiplied by t e n$"ber of s ares in iss$e, pro!iding a total !al$e for t e co"pany.s s ares o$tstanding P/E ratio T e P/E ratio 5price-to-earnings ratio9 of astock 5also called its :-@E:, or si"ply :"$ltiple:9 is a "eas$re of t e price paid for as are relati!e to t e ann$al net inco"e orprofit earned by t e fir" per s are%(2* T e -@E ratio can t erefore alternati!ely be calc$lated by di!iding t e co"pany.s "arket capitaliEation by its total ann$al earnings% Unlike t e E1@EBITDA "$ltiple # ic is capital str$ct$re4ne$tral, t e price4to4earnings ratio reflects t e capital str$ct$re of t e co"pany in '$estion% T e price4to4earnings ratio is afinancial ratio $sed for !al$ation+ a ig er -@E ratio "eans t at in!estors are paying "ore for eac $nit of net inco"e, so t e stock is moreexpensi!e co"pared to one #it a lo#er -@E ratio% T e -@E ratio can be seen as being expressed in years, (note )* in t e sense t at it s o#s t e n$"ber of years of earnings # ic #o$ld be re'$ired to pay back p$rc ase price, ignoring inflation and ti"e !al$e of "oney% T e -@E ratio also s o#s c$rrent in!estor de"and for a co"pany s are% T e reciprocal of t e -@E ratio is kno#n as t e earnings yield%(?* T e earnings yield is an esti"ate of t e expected ret$rn fro" olding t e stock if #e accept certain restricti!e ass$"ption

Definition of 'Market Average'

A measure of the overall price level of a given market, as defined by a specified group of stocks or other securities. A market average equals the sum of all current values of stocks in the group divided by the total number of shares in the group.

'Market Average'
A market average measurement is a simple ay to evaluate the price level of a group of stocks. !or e"ample, the #o $ones %ndustrial Average, hich is a price& eighted average, covers 30 blue chip stocks listed on the '(SE and is idely used to track overall ).S. stock market performance.
echnical anal!sis In finance, technical anal!sis is sec$rity analysis discipline for forecasting t e direction of prices t ro$g t e st$dy of past "arket data, pri"arily price and !ol$"e% ()* Be a!ioral econo"ics and '$antitati!e analysis incorporate tec nical analysis, # ic being an aspect of acti!e "anage"ent stands in contradiction to "$c of "odern portfolio t eory% T e efficacy of bot tec nical and f$nda"ental analysis is disp$ted by efficient4"arket ypot esis # ic states t at stock "arket prices are essentially $npredictable% A stock market index is a "et od of "eas$ring a section of t e stock "arket% 6any indices are cited by ne#s or financial ser!ices fir"s and are $sed as benc "arks, to "eas$re t e perfor"ance of portfolios s$c as "$t$al f$nds%

Alternati!ely, an index "ay also be considered as an instr$"ent 5after all it can be traded9 # ic deri!es its !al$e fro" ot er instr$"ents or indices% T e index "ay be #eig ted to reflect t e "arket capitaliEation of its co"ponents, or "ay be a si"ple index # ic "erely represents t e net c ange in t e prices of t e $nderlying instr$"ents% 6ost p$blicly '$oted stock "arket indices 5like t e t#o '$oted belo#9 are #eig ted%

KS*E +00
Karachi Stock Exchange "00 Index 5KSE-"00 Index9 is a stock index acting as a benc "ark to co"pare prices on t e ;arac i <tock Exc ange 5;<E9 o!er a period of ti"e% In deter"ining representati!e co"paines to co"p$te t e index on, co"panies #it t e ig est "arket capitaliEation are selected T e ;<E4)== is a capital #eig ted index and consists of )== co"panies representing abo$t F= percent of "arket capitaliEation of t e Exc ange% In )FF3 t e need #as felt for an all s are index to reconfir" t e ;<E4)== and also to pro!ide t e basis of index trading in f$t$re% KSE-30 Index T e ;arac i <tock Exc ange as la$nc ed t e KSE-30 Index #it base !al$e of )=,=== points, for"ally i"ple"ented fro" /riday, <epte"ber ), 2==>% T e "ain feat$re of t is index t at "akes it different fro" ot er indices are+ ;<E4?= index is based only on t e free4float of s ares, rat er t an on t e basis of paid4 $p capital% T e ot er indices in ;arac i <tock Exc ange represents total return of t e "arket% T at is, # en a co"pany anno$nces a di!idend, t e ot er indices at ;<E are not red$ced@ad,$sted for t at a"o$nt of di!idend 5# et er cas or bon$s9%A ereas, ;<E4?= Index is ad,$sted for di!idends and rig t s ares%

KMI-30 KSE Meezan Index 5;6I4?=9 co"prises of t ose ?= co"panies # ic '$alify t e ;6I < aria screening criteria% T e index #as introd$ced on ;arac i <tock Exc ange in <epte"ber 2==G and t e base period for t is Isla"ic index is 0$ne ?=, 2==G% ()* T e index is calc$lated $sing t e :free float "arket capitaliEation:% At any point of ti"e, t e le!el of index refects t e free float "arket !al$e of selected < aria co"plaint s ares in co"parison #it t e base period% ;6I4?= is rebalanced se"i4ann$ally% T e g$idance is taken fro" '$alified and #ell rep$ted < aria experts # ile < aria co"plaint of stocks is done%
;<E46eeEan Index is also calc$lated $sing t e H/ree4/loat CapitaliEation

Free-Float Methodology'
A method by which the market capitalization of an index's underlying companies is calculated. Free-float methodology market capitalization is calculated by taking the equity's price and multiplying it by the number of shares readily available in the market. nstead of using all of the shares outstanding like the full-market capitalization method! the free-float method excludes locked-in shares such as those held by promoters and governments.

Market Capitalization'
The total dollar market value of all of a company%s outstanding shares. &arket capitali'ation is calculated by multiplying a company%s shares outstanding by the current market price of one share. The investment community uses this figure to determining a company%s si'e, as opposed to sales or total asset figures.