- It is the proportional link between the base value of the index and the free float market capitalization
- Dividing the FFMC (Rs.1000) with the index divisor (10 from the previous example), gives one the base value
- If the FFMC increases next day by 30% (hence the value increasing to Rs.1300), then dividing this value by the index divisor will give the index value at that point in time
- Hence, the index divisor acts as a link between the past and the present value of the index
- It also helps in ensuring that corporate actions such as stock splits, bonus and rights issues, mergers etc don’t distort the value of the index
To calculate value of index at any point in time, one needs to divide the free-float market cap of all shares with the index divisor
Other Benefits of the “Index Divisor”
- Apart from helping to derive the vale of the index, the index divisor also plays a great role in ‘maintenance of index’ (in technical terms)
- This means making necessary modification in the value of index divisor to counterbalance the effects of corporate actions such as those mentioned in the previous section.
- Suppossing that the number of free float shares of a company suddenly increases due to some reason, for eg because of a bonus issue
o Even though the market price of stock doesn’t move at all, the free-float market cap shown as increase, hence increasing the value of index as well (which would be a misrepresentation)
o In such a scenario, necessary adjustments are made in the index divisor so that the continuity of the index is not affected
The index divisor plays an important role in not only determining the value of the index, but also to ‘maintain the index’. Hence choosing the right index divisor is always important.
- Dividing the FFMC (Rs.1000) with the index divisor (10 from the previous example), gives one the base value
- If the FFMC increases next day by 30% (hence the value increasing to Rs.1300), then dividing this value by the index divisor will give the index value at that point in time
- Hence, the index divisor acts as a link between the past and the present value of the index
- It also helps in ensuring that corporate actions such as stock splits, bonus and rights issues, mergers etc don’t distort the value of the index
To calculate value of index at any point in time, one needs to divide the free-float market cap of all shares with the index divisor
Other Benefits of the “Index Divisor”
- Apart from helping to derive the vale of the index, the index divisor also plays a great role in ‘maintenance of index’ (in technical terms)
- This means making necessary modification in the value of index divisor to counterbalance the effects of corporate actions such as those mentioned in the previous section.
- Suppossing that the number of free float shares of a company suddenly increases due to some reason, for eg because of a bonus issue
o Even though the market price of stock doesn’t move at all, the free-float market cap shown as increase, hence increasing the value of index as well (which would be a misrepresentation)
o In such a scenario, necessary adjustments are made in the index divisor so that the continuity of the index is not affected
The index divisor plays an important role in not only determining the value of the index, but also to ‘maintain the index’. Hence choosing the right index divisor is always important.
 |
Subscribe to Ashwin Group |
Visit this group |
No comments:
Post a Comment