This article tries to explain the process behind calculation of NEPSE index along with the concept of market capitalization and adjustment to base period in case of new listing. So, before delve into the calculation method, let us first understand the concept of market capitalization.
Concept of Market Capitalization of a Company
In case of Nepal, the market capitalization is calculated by multiplying closing price with respective outstanding number of shares of a company. The number of outstanding shares sometimes termed as the ‘number of listed shares’. Whenever, the term ‘number of listed shares’ appears, we should mean it as the number of outstanding shares.
The market capitalization is an important secondary market indicator as it is compared with the indicator of the economy. Most often, it is used as leading indicator of economic situation. In terms of the mathematics, the market capitalization is:
Market Capitalization = Number of Outstanding Shares * Closing Prices of a Stock
Total Market Capitalization
After adding market capitalization of all companies listed in the stock exchange, we will get the total market capitalization of an economy.
Now its time to move on to the calculation process of NEPSE index.
How NEPSE Index is calculated?
The calculation of the NEPSE index is based on the concept of the total market capitalization. And, the total market capitalization is sum of market capitalization of all company listed in Nepal Stock Exchange. When we multiply the ratio of current period’s total market capitalization to base period’s total market capitalization by 100, we get the NEPSE index. This method of index calculation is called value weighted method.
This concept can be illustrated with a hypothetical example as follows:
|Company Name||Outstanding Shares||Closing Price||Market Capitalization|
|Base Period||Current Period||Base Period||Current Period|
|Total Market Capitalization (Total Market Value)||157000||187500|
Adjustment to Base in Case of New Listing
In reality, the number of the listed companies keeps on changing. Similarly, number of outstanding shares also keeps on changing as the company issues right shares or bonus shares or common shares at the time of capital needs. How is the base period adjusted in such a dynamic real world?
The actual practice to adjust the base period is as follows:
Adjusted Base Period = New Market Capitalization Including New Listing/ New Market Capitalization Excluding New Listing * Base Period’s Market Capitalization
This concept is illustrated by the following hypothetical example. First of all imagine that the initial conditions of the outstanding shares and its prices are as follows:
|Company Name||Outstanding Shares||Closing Prices||Market Capitalization of Base Period|
|Total Market Capitalization (Total market value)||157000|
Now suppose that the number of outstanding shares and the prices of the stocks at current period changed as presented below. Company ‘A’ issued 50 bonus shares and prices of the stocks altered.
|Company Name||Outstanding Shares||Closing Prices||New Market Capitalization|
|Base Period||Current Period||Current Period||Excluding New Listing||Including New Listing|
|Total Market Capitalization (Total Market Value)||175500||177750|
Following the above adjustment formula,
Adjusted Base Year = 177750/175500 * 157000 = 159012.82 .
Now the NEPSE Index for current period is, (177750/159012.82) *100 = 111.78 .