HOW TO CALCULATE NEPSE INDEX ?? [With illustrative Example]
NEPSE represents the short form of Nepal Stock Exchange and NEPSE index indicates the increase or decrease of total market capitalization of companies’ transactions that are listed in Nepal Stock Exchange. This indicates the increase or decrease of overall market; therefore it has significant importance to investors.
The investors who cannot analyze the share market, they make decision of purchasing or selling of shares with the help of this index. The countries in the world where stock exchange exist calculate one or more market index, but in Nepal only one index is calculated.
History:
The history of securities market began with the floatation of shares by Biratnagar Jute Mills Ltd. and Nepal Bank Ltd. in 1937. Introduction of the Company Act in 1964, the first issuance of Government Bond in 1964 and the establishment of Securities Exchange Center Ltd. in 1976 were other significant development relating to capital markets. Securities Exchange Center was established with an objective of facilitating and promoting the growth of capital markets. Before conversion into stock exchange it was the only capital markets institution undertaking the job of brokering, underwriting, managing public issue, market making for government bonds and other financial services. Nepal Government, under a program initiated to reform capital markets converted Securities Exchange Center into Nepal Stock Exchange in 1993. The only secondary capital market in Nepal, NEPSE operates under Securities Act,2007.
Method of Index Calculation:
After purchasing the shares in primary market, it can be purchase or sale again in another market, which is known as secondary market. This secondary market is Nepal Stock Exchange (NEPSE). This is only one market in Nepal. The companies who issue Initial Public Offering (IPO) to make transaction in secondary market have to list its stocks to Nepal Stock Exchange accompanied with certain fees. After 7 days of listing the shares/ stocks, it can be transacted (purchase or sale) in secondary market (NEPSE) through the brokers.
For example:
Suppose Bank of Kathmandu Limited issued the ordinary shares in (IPO) of 20 lakh kitta. To create environment of purchasing or selling of shares in secondary market (NEPSE) by ordinary shareholders, the Bank has to list 20 lakh kitta shares in Nepal Stock Exchange. After 7 days of listing such shares, the transaction of 20 lakh kitta of BOK start to be transacted through brokers.
214 companies are listed in Nepal Stock Exchange till Poush 2068. These companies' shares may or may not be transacted in Nepal Stock Exchange every day. In purchasing or selling of shares of particular company, it may be transacted in various price levels in single day. Among the various price levels in single day, closing price of particular company is considered to calculate the market capitalization by multiplying closing price with number of shares listed in NEPSE. If there is no any transaction occurred during the day for any company the closing price of prior day is considered to calculate market capitalization.
For example:
Suppose in NEPSE Chilime Hydropower Company Limited has made following transaction in Poush.
14, 15........18
To calculate market capitalization of CHCL in Poush 18, closing price of Poush 17 is not given because in Poush 16 and 17 CHCL shares transaction does not occur in NEPSE. Therefore to calculate market capitalization of CHCL closing price of Poush 15 is considered.
Market capitalization= closing price (Poush 15) × no. of total shares listed by CHCL
In this Way, market capitalization of companies that are listed in NEPSE will be calculated individually, by adding such individual market capitalization, total market capitalization is calculated.
For example:
214 companies are listed its ordinary shares in NEPSE. First of all NEPSE calculate market capitalization of 214 companies shares individually and sum the 214 companies individual calculation and find total market capitalization.
Market capitalization of company 1 xxx
Market capitalization of company 2 xxx
Market capitalization of company 3 xxx
...................................................... xxx
....................................................... xxx
Market capitalization of company 214 xxx
Total market capitalization xxxx
From 30 Magh 2050, NEPSE INDEX was started to be calculated and first day index is supposed to be 100.
Numerical example:
Suppose 3 companies A, B, C are listed in NEPSE(on 30th Magh 2050). Number of shares and closing market price of individual shares are given bellow.
Company
|
No. of share listed
|
Closing price
|
Market capitalization
(No of shares listed × closing price)
| |||||
Magh 30
|
Falgun 1
|
Falgun 2
|
Magh30
|
Falgun 1
|
Falgun 2
| |||
A
|
200
|
10
|
12
|
11
|
2,000
|
2,400
|
2,200
| |
B
|
300
|
20
|
18
|
15
|
6,000
|
5,400
|
4,500
| |
C
|
400
|
50
|
55
|
52
|
20,000
|
22,000
|
20,800
| |
Total market capitalization
|
28,000
|
29,800
|
27,500
| |||||
Base Nepse Index(IB)= [Total Market Capitalization/Total Amount Of share Issued (face value).]*100%
So Nepse Index at margh 30,2050 BS(IB)=[(28000)/(28000)]*100%=100
Now after Magh 30 ,NEPSE index is calculated as follows.
It= MVt/ MVb × IB
Where,
It = Index at time
MVt = Market value (market capitalization at time)
MVb = Market value at base period
IB = Index at base period
Here, Base price is Magh 30
Now,
NEPSE index of Magh 30 : It= MVt/ MVb × IB
= 28000/28000 × 100
= 100
NEPSE index of Falgun 1 : It= MVt/ MVb × IB
= 29800/28000 ×100
= 106.43
NEPSE index of Falgun 2 : It= MVt/ MVb × IB
= 27500/28000 ×100
= 98.21
In Magh 30, NEPSE index calculation is started therefore market capitalization at time is equal to market value of base period so, NEPSE is 100.
In Falgun 1, NEPSE is 106.43, in comparison to NEPSE index of Magh 1, it is increased by 6.43. This is because total market capitalization is increased from 28000 to 29800.
In Falgun 2, NEPSE is 98.21, in comparison to NEPSE index of Magh 2, therefore NEPSE is decreased by 8.22. This is because total market capitalization decrease from 29800 to 27500.
In this way, fluctuation in share price in market, NEPSE index also fluctuates accordingly.
Suppose in Falgun 2, D company is listed with 100 kitta shares with RS 100 per share, now there are 4 companies, so to calculate NEPSE index of 4 companies, adjustment in based period of total market capitalization have to be made with following formula.
Adjusted base value of market capitalization=
[New market capitalization/ old market capitalization] × Base of market capitalization before listing new shares
=[ (27,500+100*100)/27500] × 28000
= 38181.32
Now to calculate the index in Falgun 3 base price will be 38181.32 until new shares (bonus shares or right shares) and new companies listed in NEPSE. If new companies listed than adjusted base value will be calculated as above.
After including new 100 kitta of company “D “ NEPSE will be calculated as follows .
Company
|
No. of share listed
|
Closing price
|
Market capitalization
(No of shares listed × closing price)
| ||||||
Magh 30
|
Falgun 1
|
Falgun 2
|
Falgun 3
|
Magh30
|
Falgun 1
|
Falgun 2
|
Falgun 3
| ||
A
|
200
|
10
|
12
|
11
|
11
|
2,000
|
2,400
|
2,200
|
2,200
|
B
|
300
|
20
|
18
|
15
|
15
|
6,000
|
5,400
|
4,500
|
4,500
|
C
|
400
|
50
|
55
|
52
|
52
|
20,000
|
22,000
|
20,800
|
20,800
|
D
|
100
|
-
|
-
|
-
|
100
|
-
|
-
|
-
|
10,000
|
Total market capitalization
|
28,000
|
29,800
|
27,500
|
37,500
| |||||
NEPSE index of Falgun 3 : It= MVt/ MVb × IB
= 37500/38181.32 ×100
= 98.21
In Falgun 3, NEPSE is 98.21, equal to NEPSE index of Falgun 2, therefore NEPSE is Constant . This is because there is no change in market capitalization except the new listed share of Rs 10000 .
Other Index
Float Index:
NEPSE started calculating float index from Bhadra 26, 2065 (Base Date). This index represents the market capitalization of securities which are floated to public. Float index excludes promoter’s holding, government holding, strategic holding and other locked in shares like employees share- that will not come to the market for trading in the normal course. It takes into account the securities held by general public that are readily available for trading in the market.
HOW TO CALCULATE ?
Float Index =[ Current MV of all shares listed in NEPSE floated to general public/ MV of shares in Base year] *100
Base year is 26th Bhadra, 2065 or 11th September 2008.
Sensitive Index:
Sensitive index is the index calculated from the market capitalization of companies classified under group “A”.
HOW TO CALCULATE ?
Sensitive Index =[ Current MV of all shares listed in NEPSE under Group “A”/ MV of shares in Base year ] *100
Base year is 26th Bhadra, 2065 or 11th September 2008.
Sensitive Float Index:
Sensitive float index represents the market capitalization of securities of companies listed under group “A” which are floated to public.
HOW TO CALCULATE ?
Sensitive Float Index = [Current MV of all shares listed in NEPSE under Group “A” Floated to public / MV of shares in Base year] *100
Base year is 26th Bhadra, 2065 or 11th September 2008.
WHY OTHER INDEX ??
The standard NEPSE index is designed on a “Market Capitalization- Weighted” methodology, where stocks with the largest market capitalization carries the greatest weight in the index, thus making the value of the index very vulnerable to the price movement of such companies. The companies like Nepal Telecom, Nabil Bank and Standard Chartered Bank comprises approximately 32% of the entire market in terms of market capitalization. So any changes in price of the shares of these company impacts the index substantially. Commercial banks, development banks and finance companies together comprise of almost 70% of the entire market in terms of market capitalization and Nepal Telecommunication claims 18% of the weight of the market. Most of the shares of these companies are held by promoters and by government in case of NT, which are not available in market for trading.
The NEPSE index takes into account all the promoter shares, government holdings, strategic shares, employee shares and all other locked in shares while calculating the index which gives a distorted picture of the overall market performance to the investors. So, NEPSE introduced float index and sensitive float index to give more realistic picture of the market performance to the investors. Free –float methodology refers to an index construction methodology that takes in to consideration only the free float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in index. A free float index reflects the market trends more rationally as it takes into consideration only those shares that are available for trading in the market or the shares issued to general public. It excludes promoters’ holding, government holding, strategic holding and other locked in shares like employee shares. The market capitalization of each company is reduced to the extent of its readily available shares in the market and reduces the concentration of the top few companies. In this way big companies with sizeable amount of locked in shares are also included while preventing their undue influence on the index at the same time. The undue influence of large number of locked in shares is checked. It will give the investors more clear picture of the real market and boost their confidence.
