Stock market indices in bangladesh

Topic- Stock Market Indices in Bangladesh

Stock Market Indices in Bangladesh

1. Concepts of Market Index.

A stock index or stock market index is a measurement of the value of a section of the stock market. It is computed from the prices of selected stocks (typically a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.

  2. Types of Market Index with proper concepts.

Market Value-Weighted Index

The most common type of index is called market value-weighted index.  What this means is that the index measures the total value of all the outstanding stock issued by the various companies in the index,  is that companies with larger market capitalizations or value will have a larger weighting in the index and will “count more” than smaller companies.  It would not make sense for a very small company to have the same weighting in an index as a large company.  One of the drawbacks of a market-weighted index is that sometimes one company or one type of industry can make up a very large portion of the index. 

Price-Weighted Index

Another less common type of index is called price-weighted  This means that the index is calculated using a stock price instead of the company value.  The big problem with this type of index is that a company that has a stock price of tk. 100 will count twice as much as a company with a stock price of tk.50.  There is a formula used to calculate these type of indices to account for stock splits.

In Bangladesh Types of Market Index,

-DSE Gen

-Dse30

-CSE Gen

-DSE Shahriah

3. Criteria to include in DSE 30 and  DSE Shariah Index.

 Criteria to include DSE Shariah Index :

The companies, that followed Islamic Shariah based, are likely to be included with this Shariah Index. The base point of DSEX Shariah Index will be 1,000.

a)      The securities will be sorted out after screening by two ways-sector wise and accounting basis.

b)      Companies engage in advertising and media, news or sports channel, newspaper, alcohol, cloning, tobacco, gambling and trading of gold and silver cannot be placed in the shariah index.

c)       Even, financial institutions except Islamic banks, Islamic financial institutions, Islamic Insurance companies will not be eligible.

d)      Companies incorporated and managed in a completely shariah compliant manner, having a shariah supervisory board and doing transactions (business and financial) in accordance with shariah principle will be eligible.

e)      However a company's debt situation compare to its average market capitalisation during last 36 months should be less than 33 per cent to be eligible, while the company's account receivable compare to its average market capitalisation during last 36 months should be above 49 per cent.

f)       If more than five per cent revenue of a company comes from non-compliant activities it cannot be placed in the DSEX Shariah Index.

Criteria to include in DSE 30 :

The new criteria of DSE-30 index are earning per share, minimum market capitalization worth Tk 200 million, retaining minimum 30 per cent shares in public hand, minimum payment of 10 per cent dividend for the last three consecutive years and 95 per cent trading days in the last six months.

Good corporate governance, regular holding of annual general meetings and sectoral representation are the other key qualifications for becoming eligible for inclusion in the index.

4. Index calculation system in DSE and CSE.

for a certain instrument: no of total scripts * gain/loss. Then they just add up for all instruments. This formula counts ALL the outstanding scripts not the one that have been traded on that day.
Now when the face value is being changed, the number of scripts will increase, and per script gain/loss will increase too (10 taka share has probably more variability than 100 taka one).

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 30th December 1999
* Base Day index 1000

Index Calculation Algorithm (according to IOSCO Index Methodology):

                                 Yesterday's Closing Index X Current M.Cap
Current Index = --------------------------------------------------------------
                    Opening M.Cap

                               Yesterday's Closing Index X Closing M.Cap
Closing Index = --------------------------------------------------------------
                    Opening M.Cap

Current M.Cap = ∑ ( LTP X Total no. of indexed shares )

Closing M.Cap = ∑ ( CP X Total no. of indexed shares )

There are three indices in the DSE as follows :

Sl.No	Index Name	Base Index	Remarks
1	DSI (all shares)	350 (as on 01-11-1993)
2	DGEN (A, B, G & N)	817.63704 (as on 24-11-2001)	SEC directive regarding index was on 17-11-2001
3	DS30	1000 (as on 01-01-2001)

Abbreviations and Acronyms

M .Cap –Market Capitalization
DSE-Dhaka Stock Exchange
IOSCO - International Organization of Securities Exchange Commissions(IOSCO)
LTP –Last Traded Price
CP  - Closing Price

CSE

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:

Trading days	Value of portfolio	Index
DAY 1 (base day)	Tk 20,000	1000
DAY 2	Tk 21,000	1050

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 21,000, a 5% increase. Therefore, the value of the index on Day 2 will change to indicate a corresponding 5% increase in market value. The computation follows the procedure below:

                               2's portfolio value
Day 2's index = ------------------------------------------------- * Base Day's (Day 1) index
                               Base Day's (Day 1) portfolio value

                              Tk 21,000
                        = ---------------- * 1000
                              Tk 20,000
                        = 1050

5. How to realize the market condition based on change value of Index?

It is important to understand the trend of a stock market before making any investment decision. There are some key statistical measures that help understand the trend. Efforts have been made here to analyze data by adopting those measures to better understand the trend of the capital market in Bangladesh. The statistical measures include growth percentage; category-wise share performance and trend equations like price/earning (PE) ratio, initial public offering (IPO) scenario, fund-raising, turnover and market capitalization and movement of the General Index of Dhaka Stock Exchange (DSE). They are very important to forecast the future course of the market and its behavioral pattern. In evaluating the capital market performance, both the theoretical and analytical aspects of the market have been emphasized here.