Introduction to Finance

Submitted by:
Zameer Suleman Memon (K10-2612)

Contents
Stock Exchanges ............................................................................................................................................ 3
Introduction .............................................................................................................................................. 3
About Indices ............................................................................................................................................ 3
Terms to know .......................................................................................................................................... 3
Market capitalization ............................................................................................................................ 3
Categories of Capitalization: ................................................................................................................. 4
Free Float method:................................................................................................................................ 4
Bombay Stock Exchange ............................................................................................................................... 5
About BSE.................................................................................................................................................. 5
Indices ....................................................................................................................................................... 5
Important Indices ...................................................................................................................................... 5
BROAD ....................................................................................................................................................... 5
BSE SENSEX ........................................................................................................................................... 5
BSE MID-CAP ......................................................................................................................................... 6
SML CAP ................................................................................................................................................ 6
Thematic ................................................................................................................................................... 6
Shariah 50 ............................................................................................................................................. 6
Investment Strategy .................................................................................................................................. 6
BSE IPO .................................................................................................................................................. 6
DOLLEX-30, DOLLEX-30, DOLLEX-100 and DOLLEX-200 ........................................................................ 7
Sectoral ..................................................................................................................................................... 7

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Stock Exchanges
Introduction
Stock market itself is an entity, which provides a service to traders for trading stocks,
bonds and other securities. Securities traded in stock exchange are issued by companies.
Like stock is simply a share of ownership in a company. The primary role of stock
exchange is to increase the capital for the businesses. Stock exchange creates liquidity for
the security you are holding as increase in a trading makes the stock easier to be sold.
This encourages the investment and increases the capital gain, while investing in
unprofitable businesses lead to the capital losses. On the other hand, this also improves
the efficiency of public companies, as they can manage their investments easily like an
authentic price in the market through a effective demand backed by a purchasing power.
In Pakistan, Karachi has the biggest stock exchange known as Karachi stock exchange.
Although Karachi has three stock exchanges. But due to KSE, Karachi is known as the
business centre of Pakistan, where most of the businesses have established there
headquarters.

About Indices
The primary purpose of a index is to measure the a section of a stock market. Indices
can be classified in many ways. Some stock exchanges divide their sections according to
the market capitalization of companies. There is also a index made on Shariah
companies, which do trading on Islamic principles. And so on. Stock exchange is just like
any other market, where people come to trade goods, but here they trade securities
and stocks. Making indices in a stock exchange means, to make the market in a
segment. So, investors can easily be facilitated, where they want to trade.

Terms to know
Market capitalization: Total capital authorized, issued or purchased by investors. In
most cases, market capitalization can also represent the net worth of a company if it is
public limited. Market capitalization is a market estimate of a companys value, based
on perceived future prospects, economic and monetary conditions.
Market capitalization=Outstanding Shares*Prices

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Categories of Capitalization:

Mega-cap: Over $200 billion

Large-cap: Over $5 billion
Mid-cap: $1 billion$5 billion

Small-cap: $250 million$1 billion

Micro-cap: Below $250 Million
Nano-cap: Below $50 million

Free Float method: Its a method for constructing the index, in which they consider
the shares issued by the company are readily available for the investors. It excludes the
promoters holding, Government holding, strategic holding and other-in shares that do
not come to the market for trading. It is believed that free float is the most efficient and
effective method and is widely used by different indices in BSE. But, this method cant
be used by every index, because some of them need be controlled by government
strategically.
Lets see how Bombay Stock Exchange has made indices in their market, and on what
basis they have made an index.

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Bombay Stock Exchange

About BSE
Bombay Stock Market is the eighth largest stock exchange market in the world and forth
largest in the Asia, with a market capitalization of $1631 billion. 8196 companies are
listed in this exchange from which 5085 are Indian companies. It has got 24 indices in
the exchange. Being a exchange of an non-Muslim country, it has also got an separate
index for the companies running on Islamic principles, known as Shariah 50. The BSE has
introduced the first worlds centralized exchange based internet trading system, to
enable investors anywhere in the world to trade on the BSE platform.

Indices
This stock exchange has got 24 indices, which are divided according to different aspects.
In 1986, BSE developed its first index named SENSEX to give investors a platform for
measuring the market. BSE have even categorized its indices into categories:
1.
2.
3.
4.

Broad (SENSEX, MIDCAP, SMLCAP, BSE-100, BSE-200, BSE-500)

Thematic (SHARIAH 50)
Investments Strategy (BSE IPO, DOLLEX-30, DOLLEX-100, DOLLEX-200)
Sectoral (Companies from different sectors are listed sector wise. Like, auto,
banking, power, etc)

Important Indices
BROAD
BSE SENSEX
SENSEX is also known as the KSE 30, as this index deals with the companies that are
largest and most actively traded stocks and are representative on the Indian economy.
This index uses a free-float method, which means there are no restrictions on stocks
sale and purchase held by promoters, government and strategic investors. Globally free
float market capitalization is known as the best practice. It approximately accounts for
the one fifth of the market capitalization.

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BSE MID-CAP
It was launched in April, 2005. This index is to track the performance of companies with
relatively mid-size market capitalization, which means the companies having a
capitalization of $1-$5 billion. This index also uses the free float method as described in
SENSEX.

SML CAP
SML CAP was launched in April, 2005. It has a market capitalization of Rs 906,466.44 Crs.
Number of companies listed in this stock exchange are variable. Currently 271
companies are listed in this index. But, there are some restrictions on the entry in this
index for a company. Like, there should be at least 98.5% market capitalization of a
company to be listed in SML CAP, which means 98.5% of the authorized share capital
must be in the market for investors. In this index, the companies listed should be of
small-cap, mid-cap and large cap capitalization.

Thematic
Shariah 50
Being a such a big stock exchange, it also has an separate index for the companies that
are on Islamic principles according to the Islamic law(Shariah). This index was launched
in January, 2008, and it has 50 companies listed. Like other indices, this index also uses
the free float method for the stocks. It has a market capitalization of Rs. 1,794,481.94
Crs.

Investment Strategy
BSE IPO
IPO(Initial public offering) was launched in august, 2009. A company can be listed in this
index for no more than 2 years. At least 10 companies minimum are always listed on
this index. A company should have at least Rs. 100 Crs of market capitalization to enter
this listing. This index also uses the free float method for trading. This index was
launched to track the value of companies for two years after listing subsequent to
successful completion of their initial public offering (IPO).

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DOLLEX-30, DOLLEX-30, DOLLEX-100 and DOLLEX-200

This especial dollex series were launched for the international investors to evaluate the
performance of the companies. The share price is calculated by the following formula
and is displayed through BSE online trading terminals (BOLT) by taking the real time
dollar exchange rate:

This has facilitated the international very much. Calculation of the returns has
become very easy for different companies. And dollar is the also known as the
international currency for trading.

Sectoral
There are separate indices to categorize the companies in the form of sectors they belong. It becomes
easy for a investor to evaluate the company. For example, we cannot compare TATA sky with ENGRO
chemicals; they both belong to different sectors. And obviously they both will give different benefits. To
solve this problem, BSE also have a sectoral indices. There are thirteen sectors which are an index at
BSE.

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