Stock Market Index

Definition of Stock Market Index

An index is a numerical figure that measures relative change in variables between two type of durations.

Examples

If sales in year 2000 are equivalent to Kshs.25 M and for year 2001 Shs.30 M, the sales index would be follows as like:

Sales index = year 2001 sales/ Year 2000 sales

                   = (Shs.30 M/ Shs.25 M) x 100

                   = 120

Year 2001 sales are 120 percent of year 2000 sales; year 2000 is identified Base year.

A stock index hence measures relative changes in values or prices of shares.  The NSE has its base year as year 1966. Twenty (20) companies constitute the index.

The stock index is computed with using of Geometric mean (G.M) follows as like:

Today stock index = [(Today's share price G.M)²  / Yesterday's share price G.M.]X 100

Whereas G.M      =

Whereas G.M. = P₁ x P₂ x P₃ x P₄ ------- P_n = share price of companies such constitute stock index.

N = number of companies

• When stock prices are increasing, stock market index will increase and vice versa.
• Stock market index hence is an indicator of investors' confidence in the economy.