When it comes to the Index Development there are several parameters that need to be taken into the consideration. For Formula index maintenance it is necessary for you to have a knowledge about the former. Here in this article we will provide you an insight into the index calculation.
Adjustments as per the Rights Issues are concerned
Index calculation requires adjustment for the issuance of bonus as well as the rights issue. In the absence of the same, a discontinuity arises between the current value and the previous value of the index. When a company that is included in the compilation of index, gives out the right shares, then the free-float market capitalization of the given company increases by the number of the additional shares that are issued that is further based on the theoretical price of the same. An offsetting, that is the proportionate adjustment is further made to the Base Market capitalization.
Adjustment of the or for the Bonus Issue
When the company which has been included in the compilation of the index concerned leads to issuing the bonus shares, the market capitalization of that particular company does not have to undergo any type of alteration. Thus, there arises no changes as far as the Base Market capitalization is concerned. What is actually updated is only the number of shares in the given formula.
Some of the Other Issues
The need for the Base Market Capitalization Adjustment arise when the new shares are issued via observing the way of conversion of the debentures in addition to mergers and spin-offs etcetera or in case when the equity is reduced via the way of buy-back of the shares or the corporate restructuring etcetera.
Base Market Capitalization Adjustment
For this we use a formula. The formula used for adjusting the Base Market capitalization is given as follows:
New Base Market capitalization = Old Base Market capitalization x (New Market capitalization/ Old Market capitalization)
All in all, this is an insight into the Index Calculation. Using the formula and the steps concerned, you can simply get the values that you want. It is a simple process but there is a lot to be learnt.