Introduction: Stock index is very much important leading indicator which can be used for several purposes. It can be used as a benchmark to judge the performance of professional money managers. It can be used to facilitate the establishment and maintenance of several types of index fund and exchange traded fund (ETF). Securities analysts, portfolio managers, and academicians doing research use stock market indexes to examine the factors that influence aggregate security price movements and to compare the risk-adjusted performance of alternative asset classes.
Finally it can be used as a proxy for the market portfolio of risky asset that facilitate the calculation of market return and risk. Stock index can be a price weighted index, a value weighted index and an unweighted index or an equal-weighted index. Dhaka Stock Exchange has three indexes, namely, DSI, DGEN and DS20. All are market value weighted index and these are calculated according to the IOSCO (International Organization of Securities and Exchange Commission) method.
Dhaka Stock Exchange calculates current index on real time basis as well as closing index for every trading day. Stock index: There are three indices in the DSE as follows: |Sl. No |Index Name |Base Index | Latest Index (05. 08. 08) | |1 |DSI (all shares) |350 (as on 01-11-1993) |2332. 90585 | |2 |DGEN |817. 63704 (as on 24-11-2001) |2714. 3358 | | |(A, B & G) | | | |3 |DS20 |1000 (as on 01-01-2001) |2482. 85967 | DSI: ? It is a value weighted index. ? It is calculated according to IOSCO method. ? Its base value is 350 (as on 01-11-1993). ? Latest index is 2332. 90585 (dated 05. 08. 08). ? All types of shares are included in the calculation of DSI.
Different types of share are followings- Group A: Companies which are regular in holding the current annual general meetings and have declared dividend at the rate of ten percent or more in the last English calendar year are in this ‘A’ group. Group B: Companies which are regular in holding the annual general meetings but have failed declare dividend at least at the rate of ten percent in the last English calendar year is in this B category. Group G: ‘G’ stands for Greenfield. Companies who have not started production before approaching into the market included in this G group.
Group Z: Companies which have failed to hold the current annual general meetings or have failed to declare any dividend or which are not in operation continuously for more than six months or whose accumulated loss after adjustment of revenue reserve, if any, is negative and exceeded its paid up capital are in this Z group Group N: Recently another group is introduced which is called ‘N’ group. ‘N’ stands for New. The companies which are not included in the Greenfield category but new in the stock exchanges are included in the group N. DGEN: ? It is a value weighted index. ? It is calculated according to IOSCO method. Its base value is 817. 63704 (as on 24-11-2001). ? Latest index is 2714. 33358 (dated 05. 08. 08). ? A, B, G categories of shares are included in the calculation of DGEN which are discussed earlier. DS20: ? It is a value weighted index. ? It is calculated according to IOSCO method. ? Its base value is 1000 (as on 01-01-2001) ? Latest index is 2482. 85967 (dated 05. 08. 08). ? DSE-20 index was introduced on January 01, 2001 with several blue chips. ? The index has been revised twice in 2002 and 2004. ? The Dhaka Stock Exchange (DSE) will expand the existing DSE-20 index to DSE-25 by bringing five more listed blue chips under its fold.
DSE-25 will be implemented as soon as possible after the approval by their board as the revision has already been completed, which will reflect the market behavior properly. ? The DSE -25 will include new companies from IT and insurance sectors for the first time since the inception of DSE – 20 on January 1, 2001. DSE is accommodating more listed companies in the index as the number of the companies has risen to 267 until August 2008 from 221 in early 2001. ? Selective Blue chip Stocks, which fulfill the criteria, are included in the calculation of DS20.
They usually have a long operating history, steady earnings and a good reputation. As they are selected to be enlisted in DSE-20 index those companies are reviewed every six month basis. The criteria taken into account in formulating the index are- ? Market capitalization at least Taka 200 million ? free float stock in the market at least 20% shares of the company remains in the hands of general public ? minimum payment of 10% dividend for the last three consecutive years ? 95 percent trading day’s liquidity in terms of trading during the last six months. Subjective criteria such as good corporate governance, ? Regular holding of annual general meeting and ? Sector representation. Name of companies of DSE-20 index: 1. Dhaka Bank Ltd. 2. Islami Bank Ltd. 3. National Bank Ltd. 4. Prime Bank Ltd. 5. Southeast Bank Ltd. 6. Uttara Finance. 7. ACI Ltd. 8. Beximco Pharma. Ltd 9. Square Pharmaceuticals Ltd. 10. A. M. C. L (Pran) 11. BATBC 12. Apex Tannery Ltd 13. Bata Shoe Company 14. Bangladesh Lamps Ltd 15. Singer 16. BOC Bangladesh Ltd 17. GQ Ball Pen Industries 18. Meghna Cement Mills Ltd. 19. Monno Ceramic 20. Square Textile Ltd.
Index Calculation Algorithm (IOSCO Method): All of the DSE indexes are market value weighted index and these are calculated according to the IOSCO (International Organization of Securities and Exchange Commission) method. Dhaka Stock Exchange calculates current index on real time basis as well as closing index for every trading day. Index Calculation Algorithm is followed- Yesterday’s Closing Index X Current Market Capitalization Current Index = ————————————————————————- Opening Market Capitalization
Yesterday’s Closing Index X Closing Market Capitalization Closing Index = ——————————————————————————- Opening Market Capitalization Here, Current Market Capitalization = ? (Last Traded Price X Total no. of indexed shares) Closing Market Capitalization= ? (Closing Price X Total no. of indexed shares) Opening Market Capitalization = ? (Opening Price X Total no. of indexed shares) How to determine Closing Price?
The closing price for a security shall be determined as per the weighted average price of all the trades in the last 30 (thirty) minutes before the closing session. If there is no trade during the above specified time, the weighted average price of maximum 20 (twenty) number of trades preceding the above 30 (thirty) minutes shall be taken for determination of closing price. If there has been no trade in the security during the continuous trading session the opening price of the security shall be treated as the closing price. How to determine Opening Price?
The calculation of the opening prices of securities is made on the basis of orders entered in the system during the Pre-opening session. Where there is no trading of securities, the last closing price of that security shall be its opening price. Conclusion & Suggestions: It is appreciating that all of DSE indices are market value weighted index and calculated according to the IOSCO (International Organization of Securities and Exchange Commission) method. It is also appreciating that Dhaka Stock Exchange Ltd. calculates current index on real time basis as well as closing index for every trading day.
Because real time basis current index calculation as well as closing index is appealing for the interested parties like investors, analysts’ technicians and portfolio managers etc. Proposal for expanding DS20 to DS25 is also acceptable because number of listed companies has been increased in recent days. Some suggestions are followings- ? Review of the companies under DS20 should be performed more frequently and if review warrants changes in the composition of the companies under DS20, it should be implemented instantaneously. ? Several other indexes can be introduced to convey more information to he investors, such as Sector index like banking sector index, food sector index, medicine sector index, and other industry sector indexes; different types of group index like ‘A’ group index, ‘B’ group index. ‘Z’ group index etc; Bond index; composite stock-bond index; small cap, large cap index etc. ? Opportunities for investment in the stock indexes should be established. For that index fund and exchange traded fund should be established. So that investor can easily take opportunities for well managed portfolio as index fund and exchange traded fund provide well managed return.