The Bombay stock exchangeTirthankar Sutradhar

Mehak Gupta

• Established in 1875.

• BSE Ltd. (formerly known as Bombay Stock Exchange Ltd) - one of Asia’s fastest stock exchanges, with a speed of 200 microseconds .

• With a broad shareholder-base that includes two leading global exchanges, Deutsche Bourse and Singapore Exchange, as strategic partners.

•More than 5000 companies- listed on BSE, making it the world's top exchange in terms of listed members.

• The companies listed on BSE Ltd. command a total market capitalization of USD 1.51 Trillion as of May 2014.

• It is also one of the world’s leading exchanges (3rd largest in March 2014) for Index options trading.

Brief Introduction

• BSE provides an efficient and transparent market for trading in equity, debt instruments, derivatives, and mutual funds.

• Also has a platform for trading in equities of small-and-medium enterprises (SME).

•Over the past 139 years, BSE has facilitated the growth of the Indian corporate sector by providing an efficient capital-raising platform.

What it does

• The S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also-called the BSE 30 or simply the SENSEX

• Is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange.

• The 30 component companies which are some of the largest and most actively traded stocks, are representative of various industrial sectors of the Indian economy.

• Regarded as the pulse of the domestic stock markets in India.

• The base value of the S&P BSE SENSEX is taken as 100 on 1 April 1979, and its base year as 1978–79.

SENSEX and The BSE NATIONAL INDEX:The two critical indices

• The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE NATIONAL INDEX (Base: 1983-84 = 100)

• It comprised 100 stocks listed at five major stock exchanges in India - Mumbai, Calcutta, Delhi, Ahmedabad and Madras.

• The BSE National Index was renamed BSE-100 Index from 14 October 1996 and, since then, its calculations take into consideration only the prices of stocks listed at BSE.

• BSE disseminates information on the Price-Earnings Ratio, the Price to Book Value Ratio, and the Dividend Yield Percentage of all its major indices on day-to-day basis.

• The values of all BSE indices are updated on a real time basis during market hours and displayed through the BOLT system, the BSE website, and news wire agencies.

• All BSE Indices are reviewed periodically by the BSE Index Committee. • This Committee, which comprises eminent independent finance professionals, frames the broad policy guidelines for the development and maintenance of all BSE indices. The BSE Index Cell carries out the day-to-day maintenance of all indices and conducts research on development of new indices.

• Bolt: This automated, screen-based trading platform called BSE On-line trading (BOLT) had a capacity of 8 million orders per day

Working of the BSE

मुं��बई शे�अर ब�जा�र

Sensitive Index

• How the value of the “BSE Sensex” or “sensitive index” is calculated?

• The Sensex has a very important function. The Sensex is supposed to be an indicator of the stocks in the BSE.

• It is supposed to show whether the stocks are generally going up, or generally going down.

• To show this accurately, the Sensex is calculated taking into consideration stock prices of 30 different BSE listed companies.

• It is calculated using the “free-float market capitalization” method.

• This is a world wide accepted method as one of the best methods for calculating a stock market index.

Market Capitalization

• Market cap or market capitalization is simply the worth of a company in terms of it’s shares! To put it in a simple way, if you were to buy all the shares of a particular company, what is the amount you would have to pay? That amount is called the “market capitalization”!

• To calculate the market cap of a particular company, simply multiply the “current share price” by the “number of shares issued by the company”!

i.e, Market cap of company ‘X’ = (current share price) x (no. of issued shares by company X)

• Depending on the value of the market cap, the company will either be a “mid-cap” or “large-cap” or “small-cap” company!

According the BSE, any shares that DO NOT fall under the following criteria, can be considered to be open market shares:

• Holdings by founders/directors/ acquirers which has control element

• Holdings by persons/ bodies with "controlling interest"

• Government holding as promoter/acquirer

• Holdings through the FDI Route

• Strategic stakes by private corporate bodies/ individuals

• Equity held by associate/group companies (cross-holdings)

• Equity held by employee welfare trusts

• Locked-in shares and shares which would not be sold in the open market in normal course.

Free-Float market cap

• Many different types of investors hold the shares of a company! The Govt. may hold some of the shares. Some of the shares may be held by the “founders” or “directors” of the company. Some of the shares may be held by the FDI’s etc.

• Now, only the “open market” shares that are free for trading by anyone, are called the “free-float” shares. When we are calculating the Sensex, we are interested in these “free-float” shares.

• A simple way to understand the “free-float market cap” would be, the total cost of buying all the shares in the open market!

Calculation of free-float Market Cap

• First: Find out the “free-float market cap” of all the 30 companies that make up the Sensex!

• Second: Add all the “free-float market cap’s” of all the 30 companies!

• Third: Make all this relative to the Sensex base. The value you get is the Sensex value!

Example:

• Suppose, for a “free-float market cap” of Rs.100,000 Cr... the Sensex value is 4000…

• Then, for a “free-float market cap” of Rs.150,000 Cr... the Sensex value will be..

• So, the Sensex value will be 6000 if the “free-float market cap” comes to Rs.150,000 Cr!

Please Note: Every time one of the 30 companies has a “stock split” or a "bonus" etc. appropriate changes are made in the “market cap” calculations.

Why 30 Companies?

• Now, there is only one question left to be answered, which 30 companies, why those 30 companies, why no other companies?

• The 30 companies that make up the Sensex are selected and reviewed from time to time by an “index committee”.

• This “index committee” is made up of:• Academicians• Mutual fund managers• Finance journalists• Independent governing board members• Other participants in the financial markets.

Main criteria for selecting the 30 stocks

• Market capitalization: The company should have a market capitalization in the Top 100 market capitalization’s of the BSE. Also the market capitalization of each company should be more than 0.5% of the total market capitalization of the Index.

• Trading frequency: The company to be included should have been traded on each and every trading day for the last one year. Exceptions can be made for extreme reasons like share suspension etc.

• Number of trades: The scrip should be among the top 150 companies listed by average number of trades per day for the last one year.

• Industry representation: The companies should be leaders in their industry group.

• Listed history: The companies should have a listing history of at least one year on BSE.

• Track record: In the opinion of the index committee, the company should have an acceptable track record.

ComponentsAs of 10 April 2014

MilestonesA timeline on the rise of the SENSEX through Indian stock market history

• 1000, 25 July 1990 – On 25 July 1990, the SENSEX touched the four-digit figure for the first time and closed at 1,001 in the wake of a good monsoon and excellent corporate results.

• 2000, 15 January 1992 – On 15 January 1992, the SENSEX crossed the 2,000 mark and closed at 2,020 followed by the liberal economic policy initiatives undertaken by the then finance minister and Former Prime Minister of India Dr. Manmohan Singh.

• 3000, 29 February 1992 – On 29 February 1992, the SENSEX surged past the 3,000 mark in the wake of the market-friendly Budget announced by Dr. Manmohan Singh.

• 4000, 30 March 1992 – On 30 March 1992, the SENSEX crossed the 4,000 mark and closed at 4,091 on the expectations of a liberal export-import policy. It was then that the Harshad Mehta scam hit the markets and SENSEX witnessed unabated selling.

• 25,000, 16 May 2014 - The SENSEX crossed record 25,000 level for the first time, on 16 May 2014 and reached its peak of 25,364.71 due to winning of the BJP led NDA government.

• 27,000, 2 September 2014 - The SENSEX closed at 27,019.39, for its first close above the 27,000 level, on 2 September 2014. This is the sixth 1000-point milestone the index has crossed in 2014, tying a record set in 2007.

Graph of S&P BSE SENSEX