Stock Exchanges

Content
• History of Stock Exchange
• Stock Exchange: Barometer of the Economy
• Importance of Stock Exchanges
• Major Stock Exchange Overview
– NYSE
– NASDAQ
– Dow Jones Index
– LSE
– BSE
– NSE
 History of Stock Exchanges
• The history of stock exchanges can be traced to 12th century
France, when the first brokers are believed to have
developed, trading in debt and government securities.

• The Amsterdam Stock Exchange, created in 1602, became the

first official stock exchange when it began trading shares of
the Dutch East India Company. These were the first company
shares ever issued.

• By the early 1700s there were fully operational stock

exchanges in France and England, and America followed in
the later part of the century.
 Stock Exchanges: Barometer of the
Economy
• The stock market is the barometer for performance
(past & future) of the corporate sector of an
economy.
• Stock Exchange rise and fall indicates the confidence
of the investors in an economy.
• Bull market indicates the growth of an economy and
Bear represents the falling economy.
 Importance of Stock Exchanges
• One of the key advantages is that stock exchanges
are an efficient medium for raising resources for
corporate.
• Stock Exchanges act medium for channeling savings
from the public by way of issue of equity / debt
capital by joint stock companies listed on the stock
exchanges.
• Stock Exchanges helps in the wide dispersal of
information and the need to disclose adequate
information from corporates to different
shareholders.
• It helps in providing the easy liquidity to the
investors.
Major Stock Exchange Overview
New York Stock Exchange
• The New York Stock Exchange traces its origins to 1792, when
24 New York City stockbrokers and merchants signed the
Buttonwood Agreement. This agreement set in motion the
NYSE’s unwavering commitment to investors and issuers
• Trading approximately 1.46 billion shares each day, the New
York Stock Exchange (NYSE) is the leading stock exchange in
the world.
• The exchange trades stocks for some 2,800 companies,
ranging from blue chips to new high growth companies.
• Each listed company has to meet strict requirements, as the
NYSE works to maintain its reputation of trading strong, high
quality securities.
 Contd..
• The NYSE is controlled by its six to twelve
member Board of Directors.
• All Directors are independent of the trading
floor's activities, except for the CEO who is left
out of certain proceedings.
• The Board of Directors is elected annually and
in turn elects the Board of Executives, which
consists of 12 to 22 representatives from the
many member firms on the exchange.
 NYSE Indices
• NYSE indices closely reflect today's market as NYSE-listed
companies account for a substantial portion of the world's
economy. Included in these indices are NYSE-listed U.S.
companies which represent 81% and 52% of the available market
capitalization of all publicly traded companies in the United States
and around the world, as of year-end 2007.

• NYSE Indices are:

– NYSE Composite
– NYSE Energy
– NYSE Financial
– NYSE Healthcare
 Index Valuation
• Current index value as determined by consolidated
trade data and shares outstanding/divisor values for
the index.

For each security in the index, NYSE Arca will

calculate the index weight by multiplying the last sale
price for the security and the shares outstanding.
This will provide the index weight for the security.
The index value is the sum of these index weight
values divided by the divisor value.
 NASDAQ
• The NASDAQ, an acronym for National Association of
Securities Dealers Automated Quotations, is an
electronic stock exchange with 3,300 company
listings.
• NASDAQ currently has a greater trading volume than
any other U.S. exchange, making approximately 1.8
billion trades per day.
• The NASDAQ is a publicly owned company, trading its
shares on its own exchange under the ticker symbol
NDAQ.
 NASDAQ 100
• Launched in January 1985, the NASDAQ-100
Index represents the largest non-financial
domestic and international securities listed on
The NASDAQ Stock Market based on market
capitalization.
• The NASDAQ-100 Index is calculated under a
modified capitalization-weighted
methodology.
 Dow Jones Indexes
• Dow Jones Indexes is a unit of Dow Jones &
Company , a subsidiary of News Corporation.
• Dow Jones Indexes is a leading full-service index
provider that develops, maintains and licenses
indexes for use as benchmarks and as the basis of
investment products.
• Best known for the Dow Jones Industrial Average.
• Dow Jones Indexes offers more than 130,000
equity indexes as well as fixed-income and
alternative indexes, including measures of the
hedge fund and commodity markets
Dow Jones Methodology
• The Dow Jones Averages are unique in that they are
price weighted rather than market capitalization
weighted.
• The indexes are just what their names imply: basic,
easy-to-calculate averages. To calculate one of the
averages, simply add up the prices of its components
on their primary exchanges and divide the sum by the
divisor.
• Over the years, adjustments have been made to the
divisors to ensure the continuity of the averages after
corporate actions such as spin-offs and stock splits.
 Contd..
• The formula for calculating a divisor change is as
follows:
Dt+1 = Dt*  Ca t /  Ct
• Where:
Dt+1 - Divisor to be effective on trading session t+1 Dt - Divisor
on trading session t
Ca t - Components adjusted closing prices for stock dividends,
splits, spin-offs and other applicable corporate actions on
trading session t
Ct - Components closing prices on trading session t
LSE: London Stock Exchange
• The London Stock Exchange is the most important exchange in Europe
and one of the largest in the world.
• It lists over 3,000 companies and with 350 of the companies coming from
50 different countries, the LSE is the most international of all exchanges.
• The London Stock Exchange is comprised of two different stock markets:
-the Main Market and the Alternative Investment Market (AIM).
• Approximately 1,800 of the LSE's company listings trade on the Main
Market, and the total market capitalization is over 3,500 billion.
• The Alternative Investment Market on the other hand trades small-caps,
or new enterprises with high growth potential. Over 1,060 companies list
on this market, with a total capitalization of 37 billion.
• In October 2007 the Exchange merged with Borsa Italiana S.p.A making us
Europe's leading equities exchange.
 MAIN MARKET
• The London Stock Exchange’s Main Market is
the world’s most international market for the
listing and trading of equity, debt and other
securities.
• Its location at the heart of the world’s leading
financial centre makes it the ideal home to
over 1,600 companies from 60 countries
across 42 sectors, including many of the
world’s largest, most successful and most
dynamic companies
 BSE
• Oldest stock exchange in Asia.
• Informally began as 22 traders around a banyan tree in
Mumbai in the 1850’s.
– Called themselves as “The Native Share & Stock Brokers
Association”
• Formally organized in 1875 as the Bombay Stock Exchange
• First stock exchange in the country to obtain permanent
recognition in 1956 from the Government of India under
the Securities Contracts (Regulation) Act, 1956.
SENSEX Calculation Methodology
• SENSEX is calculated using the "Free-float Market Capitalization"
methodology.

• As per this 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.

• The market capitalization of a company is determined by multiplying the

price of its stock by the number of shares issued by the company.

• This market capitalization is further multiplied by the free-float factor to

determine the free-float market capitalization.

• Divide the Free-float market capitalization of 30 companies in the Index

by a number called the Index Divisor.
 Free-float Bands
% Free-Float Free-Float Factor % Free-Float Free-Float Factor

>0 – 5% 0.05 >50-55% 0.55

>5-10% 0.10 >55-60% 0.60

>10-15% 0.15 >60-65% 0.65
>15-20% 0.20 >65-70% 0.70
>20-25% 0.25 >70-75% 0.75
>25-30% 0.30 >75-80% 0.80
>30-35% 0.35 >80-85% 0.85
>35-40% 0.40 >85-90% 0.90
>40-45% 0.45 >90-95% 0.95
>45-50% 0.50 >95-100% 1.00
 NSE
• NSE was promoted by leading Financial
Institutions at the behest of the Government of
India and was incorporated in November 1992 as
a tax-paying company unlike other stock
exchanges in the country.
• NSE commenced operations in the Wholesale
Debt Market (WDM) segment in June 1994. The
Capital Market (Equities) segment commenced
operations in November 1994 and operations in
Derivatives segment commenced in June 2000.
 India Index Services & Products Ltd.
(IISL)
• Major Indices:
1. S&P CNX Nifty
2. CNX Nifty Junior
3. CNX 100
4. S&P CNX 500
5. CNX Midcap*
6. Nifty Midcap 50
7. S&P CNX Defty
 S&P CNX Nifty
• S&P CNX Nifty is a well diversified 50 stock
index accounting for 21 sectors of the
economy.
• The traded value for the last six months of all
Nifty stocks is approximately 44.89% of the
traded value of all stocks on the NSE
• Nifty stocks represent about 58.64% of the
total market capitalization as on March 31,
2008.
METHOD OF COMPUTATION: S&P CNX
NIFTY
• S&P CNX Nifty is computed using market
capitalization weighted method, wherein the
level of the index reflects the total market value
of all the stocks in the index relative to a
particular base period.
• The method also takes into account constituent
changes in the index and importantly corporate
actions such as stock splits, rights, etc without
affecting the index value.
 CRITERIA OF SELECTION OF
CONSTITUTENT STOCKS
• The constituents and the criteria for the
selection judge the effectiveness of the index.
Selection of the index set is based on the
following criteria :
1. Liquidity (Impact cost)
2. Market Capitalisation
3. Floating Stock
LIQUIDTY (IMPACT COST)
• For inclusion in the index, the security should have
traded at an average impact cost of 0.75% or less
during the last six months for 90% of the observations
for a basket size of Rs. 5 million.

• Impact cost is cost of executing a transaction in a

security in proportion to the weightage of its market
capitalisation as against the index market capitalisation
at any point of time. This is the % mark up suffered
while buying / selling the desired quantity of a security
compared to its ideal price (best buy + best sell) / 2.
 CONTD…
• For example, for the below order book:

Buy (Qty) Buy (Price) Sell (Qty) Sell (Price)

1000 98 1000 99

2000 97 1500 100

1000 96 1000 101

• To Buy 1500 Shares:

Ideal Price = (99 + 98)/2 = 98.5

Actual Buy Price = (1000 X 99 + 500 X 100)/1500 = 99.33
(For 1500 shares) Impact Cost = [(99.33 - 98.5)/98.5] X 100 = 0.84%
 CONTD…
Market Capitalization:
Companies eligible for inclusion in Nifty must have a six
monthly average market capitalisation of Rs.500 crores or
more during the last six months.

Floating Stock:
Companies eligible for inclusion in S&P CNX Nifty should have
At least 10% floating stock. For this purpose, floating stock
shall mean stocks which are not held by the promoters and
associated entities (where identifiable) of such companies.