Luận văn a study on sector index of stock market proposal for development of fpts sector index

This thesis “A study on sector index of stock market and proposal for development of FPTS sector index” is aimed al give oul a detailed proposal for the development of FP'I'S sector indi

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VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

rt

Nguyen Minh Khoi

A STUDY ON SECTOR INDEX OF STOCK MARKET

PROPOSAL FOR DEVELOPMENT OF

FPTS SECTOR INDEX

MASTER OF BUSINESS ADMINISTRATION THESIS

Hanoi - 2008

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VIETNAM NATIONAL UNIVERSITY, HANOL

SCHOOL OF BUSINESS

Nguyen Minh Khoi

A STUDY ON SECTOR INDEX OF STOCK MARKET

PROPOSAL FOR DEVELOPMENT OF

1 DR TRAN DOAN KIM

2 TRAN PHUONG LAN, MBA, PH.D CANDIDATE

TIanoi - 2008

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1.1.2.5 By slyle (value or growth) 8 1.1.2.6 By dividend (dividend indices) 8 1.1.2.7 By combination of the above characteristics 8

1.2.1 Sector monitoring and đetermiming secter trend 8 1.2.2 Creationofindew-linkediwestnsntprodueis Ð

1.3.3.1 Reasons for divisor adjustment cscs áieeeeeereeeroeoee cục Tổ 1.3.3.2 Divisor adjustment formula „18 13.33 Timing of divisor adjustments - - 17

Chapter Z: ANALYSIS OF SECTOR INDICES

2.44 Analysis of international sector indices

2.11 S&P select industry indice

212 Dow Jones U.S Industry Indices oi

2.1.2.2 Sector classification system 22

2.1.2.3 Index membership - 23

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2.1.4.1 Index description - - - 26 2.1.4.2 Sector classification system _ - - 26 2.1.4.3, Index membership

2.1.4.4, Index calculation

3.1.5.1 Index description and scclor classifivation system 29

2.1.5.3 Index calculation - - - 31 2.1.6 Comparisonand eonelusionofintemational sector indices 32

Bn a ố 2.1.6.2, Conelusion

2.2 Analysisoflocalsector indices

2321 VN-Index and LIASTC Index - - 34 2.2.1.1 Index description - - - 34 2.2.1.2 Index membarship and eaieulatien « co so 35

2.3.3.2 Index membership and calculation -

2.2.4, Thang Long 20, 30 Hdex à ceeeeeeeeeeeeeeee đỔ 3.2.4.1 Index doscription - - - 46 2.2.4.2 Index Membership - - - 46 2.2.4.3, Index calenlation ssnzeerrrrerrrarrrrroere đ7 32.5 §8130 Idex ì ceieeereeeeereoeee AB 2.2.5.1, Index đescription -48 2.2.5.2 Index membership and calculation - - 49

vị

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2.2.6 Loealindices cammparison - 50

2.2.7.1 Drawbacks of VN-Index and [IASTC inđex - - 52

2 Additional drawbacks of other local index

Chapter 3: PROPOSAL FOR DEVELOPING FPTS SECTOR INDEX

3.343 Membsr sclcction ñowchairt

3.4 User requirement đescription (URD

REFERENCES

vii

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Steps to calculate indices includes 3 major steps

Summary of Momingstar sector index family CBY Index family

CRY Sector Index family

DC VN30 Domestic performance vs VNUNDEX

DC VN30 Foreign performance again

SSI 30 performance in 2007 Procedure to select stacks to KP''S sector index Page layout of FPTS sector indices pages

Prototype of FPTS sector index homepage Prototype of FPS sector index sector page

Prototype of FPTS sector member page

List of tables

‘able 1.1: Divisor adjustment formula table

‘Yable 2.1: Comparison of international sector indices

‘able 2.2: Top 10 companies in LC VN30

Table 2.3: Thanglong Index scoring table

‘fable 2.4: Local indices comparison

‘lable 3.1: Major element and content of FPT'S sector indices

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List† of cquations

Equation 1.1: Passcher method formula

Fquation 1.2: Laspeyres method formula

Equation 1.3: Fisher method formula

Equation 1.4: Simple arithmetic price average formula Fquation 1.5: Simple geometric price average formula

Equation 1.6: Index calculation formula

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Aatudy on sector index of đoek mzrkel ~yroposal for đevelopmment df TPTS sector index

INTRODUCTION

Ld Research problem

One of the mest widely used tools to track industry or scctor

performance in the securities market is sector indices ‘These are the essential

tools for investors to follow up sector movements as well as to see the trend in

those movements However, the securities market of Vietnam still lacks of an

comprehensive and effective sector indices tools since the official market indices of the securities market of Viemam (VN-Index and IIASTC-Index)

are to measure the overall market performance rather than any particular sector This thesis “A study on sector index of stock market and proposal for development of FPTS sector index” is aimed al give oul a detailed proposal for the development of FP'I'S sector indices

1.2 Objectives &Aims

1.2.1 Objectives

* Study sector index definitions

* Study sector index application and calculation methodology

indices

1.2.2 Aims

Give out detailed proposals for the development of FPTS sector index family,

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In order te achicve the objectives of the thesis, the author of thes

answer the following questions:

What are definition, types and applications of sector indices?

‘What are the calculation methods of sector indices?

What are the most known international and local sector indices? What

are the differences and similarities among them?

How to select members of FP'l'S sector indices?

Tlow to calculate FPTS sector indices?

What are the core FP'I'S sector back-end functionalities and frond-end

interfaces (user requirement description)?

Method/Approaches

Empirical method

Approaches: statistics

Scope of work

This thesis study most widely mentioned sector indices (both

international and local) by the time of finishing this thesis (August, 2008)

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websites of intemational and domestic indices

* Other resources: Internet forum, Google searches

indices for any enterprises or organizations

On the practice, it gives a detailed proposal to develop FPS sector

indices for FPT Securities Company including both methodology, back-end

and front-end design and functions ‘[his is a good example and reference for

any new sector indices

1.9 Limitations

1 The first limit of this research is from case study method ‘his method cannot cover all the theoretical issues of sector indices

2 Another limit of this research is the choices of indices for analysis

Although these are the most known sector indices but the number of

cases is limited In addition, all of local indices are just introduced

recently, and thus, the data may not be sufficient

LI Expected result:

The study expects to show the following findings

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* Bring systematic knowledge about indices and sector indices

* Provide a deep analysis of popular international and local sector indices

* Develop a detailed proposal of FPTS sector dices fer FPT Sccuritics

Company This proposal can also be considered as a specimen for other

new sector indices

LIL Follow — up (potential)

Further study can also be carried out to fine-tune the backend functions

and front-end user mlerlace and funclions afler the olficial launch of EPTS

sector indices and receiving the feedbacks from FPTS clients

1.12 Short introductions

Due to the standardized thesis format and for the sake of clarity, afler

the introduction to its topic, this thesis is divided into three chapters as

follows

1.12.1 Chapter 1: Theory foundation

‘This chapter presents to the reader what other authors have written on the chosen subjects, which cover mainly definition, types, applications and calculation of sector indies, The chapter sccks to give the topic depth and perspective, and further establish a basis on which the analysis is built

1.12.2 Chapter 2: Analysis of sector indices

‘This chapter analyzes the most 5 international and local well-known sector indices in tenn of index description, membership requirements, sector classification and calculations A detailed comparison of the two groups are also presented

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1.12.3 Chapter 3: proposal for devcloping FPTS sector index

‘This chapter, after listing the objectives of developing KPIS sector indices, presents detailed proposal for IPTS sector indices methodology, membership

requirements and user requirement description for FPTS sector indices

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Chapter 1: THEORY FOUNDATION

1.1 Introduction

1.1.1 Definition of markct index and sector index

According to Wikipedia: “In ceonomivs and finance, an index is a

single number calculated from a set of prices or of quantities Examples are a price index, a quantity index (such as real GDP), a market performance Index (such as a labor market index / job index or a stock market index), Values of the index in successive periods (days, years, etc.) summarize level of the

activity over time or across economic units (regions, countries, etc.)”

According to Standard and Poor’s: “An index is a single descriptive

stalislic that summarizes the relative change in an underlying group of

variables” In case of a securities market index, that underlying variables are prices of sccuritics available in the market including stock, bond,

derivatives important note: in the context of this thesis, the term “market

tndex”’ is also referred to as “securities market index” and can be used exchungeahly) A markel index is designed to measure price changes of an overall securities market A sector index is a market index which is designed

to measure the performance of a distinct industry sector

1.1.2 Type of market indices

Over time, many indices have been created, maintained and improved

by financial institutions in the world Indices can be classified by many characteristics of indices ‘These characteristics groups indices into groups for the purpose of classification These characteristics include but not limited to

1 Sector or industry of index members

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Geographic location: where the members of indices resides

The nature of index members’ whether they are equity, bond or

commodity

Market capitalization or size of index members

Style (value or growth) of index members

Dividend payout ratio of its stock members

1.1.2.1 By industry (Sector indices)

When in an index includes all (or representatives) stocks of an industry

or sector, that index is a sector index and measures the performance of its

industry sector

1.1.2.2, By geographic location

Global indices: include a set of investable equities around the globe that

track the performance of the global equity market

Regional indices: track the performance of regional equity markets

such as North America, Europe, Asia Pacific or Europe

National indices: track the performance of the equity market in a single

country such as US, Australia and Hong Kong market index

1.1.2.3 By the nature of index members

1

w

Kquity index: track the performance of equity securities

Bond indices: track the performance of bond markets (by broad market,

by sectors and term structure)

Commodity indices: include indices that employ different strategic

combinations of commodity futures

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1.1.2.4, By market capitalization (size)

Stock groups are categorized by their market capitalization These include large cap, mid cap and small cap indices

1.1.2.5 By style (value or growth)

The style of an index is the style of its stock members which are oflen

based on price to book ratic Price to book ratio of a stock is its share price divided by its commen equity

1.1.2.6 By dividend (dividend indices)

Dividend indices contain all dividend-paying stocks that pay dividends

consistently and sustainably or dividend leaders’ indices that include the

highest yielding

1.1.2.7, By combination of the above characteristics

An index can have combination of the above-said characteristics For

oxample: the combination of composite siylo indiccs and capitalization

indices such as large-value indices and small-growth indices

1.2 Sector index applications

Sector indices have become vilal investment lools for professional

investors Main applications of sector indices include:

1.2.1 Sector monitoring and determining scctor trend

Using seclor index values, investors can quickly grasp secLor

performance and shifting patterns A sector index acts as a proxy for the aggregate price changes of all of the stocks which make up that sector and, as

a result, measures the price direction or volatility of the particular sector.

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8ecLor indices are updaLed Írequently hroughoul cach trading day so that

trends in market price movements can be quickly seen, thereby enabling trading decisions (i.e buy, sell or hold at any particular time) to be made

expeditiously

1.2.2 Creation of index-linked investment products

Data and insights from a particular sector are inputs to support the

crcallon oÍ mdex-lnked imvesiment products such as mutual funds and derivatives etc

1.2.3 Precise asset allocations

Because there are disuncel mdices lor cach investment style, investors

could determine the corresponding portfolio risks and make precise asset

allocations accordingly

1.2.4, Hedge economic risk

Just like stocks, each sector has its own characteristics Kor example,

certain suclors can be characterized as defensive or cyclical in nature

TDefonsive sectors are less affected by recessions and cconomie adversity The utilities sector (gas, electricity) is considered defensive as demand for this scelor is slable and independent of the stale of the cconomy Conversely, cyclical sectors (for example the consumer discretionary sector which includes goods like automobiles and refrigerators etc) generate high profits in

a prosperous cconomy but low profits as the cconomy degrades Besides,

certain sectors are more interest-rate sensitive than others (such as financial

services, banking, real estate and construction)

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with cquily investing, Scvtar investing could bring the following benefits

1.2.5.2 Take advantage of long-term trends

With sector investing strategy, investors could make huge profits if they

correctly anticipate long-lerm trends of the sector For example, if investors

correctly forecast that ther would be a large aging population of haby

boomers in the United Kingdom, the United States, Canada and Australia after

the post- world war II baby boom, they could benelit from investing in the

healthcare sector because there would be an increased need for healthcare products and services by baby boomers in the future

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A stndy on sector index of stock market - proposal for development of FPTS sector index

1.3 Sector indices calculation

The calculation of sector indices comprises of four steps

Figure 1.1: Steps to calculate indices includes 4 major steps

1.3.1 Step 1: Calculation methods

Currently, there are 5 popular sector index calculation methods

1.3.1.1 Passcher method

This is a weighted average index in which the weighting factor is the number of share outstanding in the period of calculation Passcher is the most

popular method and also referred to as market capitalization weighted index

Equation 1.1: Passcher method formula

—30*F

In which: I: Passcher market price index

P,: Price at the time of t (reporting period)

Po: Price at the base time (t =0)

Qe Quantity (weighting factor) at the time of calculation (t)

The indices KOSPI (Korea); S&PSO0(USA), FT-SE 100 (Britain) ;

TOPIX (Japan) ; CAC (France), TSE (Taiwan), Hangseng (Hong Kong);

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Swish indices,,, and Vn-Index and HASTC-Index of Vietnam apply this

method

1.3.1.2 Laspeyres method

This is a weighted average index with the weighting factor is the number

of share outstanding in the period of calculation

Laspeyres price average index is a weighted average index in which the

weighting factor is the number of share outstanding in the base period

Consequently, the calculation result depends on the proportion of outstanding

shares in the base period

Equation 1.2: Laspeyres method formula

—

In which: lụ: Laspeyres average price index

Pr: price at time of t (reporting period) Po: price at the base period (t =0)

Qo: Quantity or the outstanding shares (weighting factor) at the base

period (t=0)

There are few countries applying this Laspeyres method including German FAZ and DAX

1.3.1.3 Fisher method

Fisher average price index is the geometric mean between Passcher

average price index and Laspeyres average price index This method

overcomes the weaknesses of the two above methods since its result depends

both on the weighting factors at both base period and calculation period

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Equation 1.3: Fisher method formula

Tea Jl h

An which: [;: Fisher average price index

I: Passcher average price index

Jj: Laspeyres average price index

In theory, this method is available, but in fact, no country has applied

this method

1.3.1.4 Simple arithmetic price average

Beside the above methods, the simple arithmelic average price index is also popular The formula is simple: the total sum of stock price is divided by the

number of stocks included

Equation 1.4: Simple arithmetic price average formula

EP

= 7

In which: I,: simple arithmetic price average

P;: price of stock i

n: number of stock included in the index

The Dow Jone index family of the USA, Nikkei 255 of Japan, and MBI of

Italia apply this method, This method is appropriale when the price of stocks

listed is relatively near one another or in other word; their standard deviation (6)

is low

1.3.1.5 Simple peometric price average method

Equation L.5: Simple geometric price average formula

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included is relatively high The indices Value line (USA), FT-30 (Britain)

apply this method

1.3.1.6 Comparison of index calculation method

It is very hard to say which index calculation method is better than other method in general The choice of calculation method depends on the purpose of each index, the popularity of each method and is subject to the decision of the index developers However, Passcher method or market capitalization weighted method is becoming increasingly popular nowadays

since it reflects the “relative importance” of one stock via its market

capitalization as the weighting factor

1.3.2 Step 2: Members selection

The second important step in building average price index is the selection of index members The New York stock exchange includes more

than 3000 stocks while Dow Jone composite comprises of only 65 stocks in

which Dow Jones Industrial Average (DJIA) has only 30, Dow Jones

Transportation Average (ADTA) only 20 and Dow Jones Utilities Average (AJUA) only 15, Although, including only a small number of member stocks, the Dow Jones index family still lasts for long because it reflects trend, development of the overall price movement The index members are

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representative for the population since the non-represenlative members of indices are replaced by more representative ones Kor example, in November,

1999, four members of DJLA were replaced

As for Vietnam or any emerging market, since the number of stock

listed has not been large, the market index should include all listed stocks

However, the trading quantity and volume should also be taken into account

If one slock has no trading or every limited quantily for a long time, il should

be expelled from the index The purpose of that action is to make sure thal the index can reflect the fair movement of the market prices

1.3.3 Step 3: Divisor adjustment

1.3.3.1 Reasons for divisor adjustment

During the continuous calculation of a sector index, some factors that

change the quantity and value of stocks will affect the continuity of the index

The factors include inclusion, exclusion of index members, replacement of

index members, slock split or merger, stock dividend, cash dividend,

additional issuance, stock warrant, stock price adjustment on ex-right date To negate for distortions caused by those factors so that the average price index only reflects the changes im slock price, the index divisor adjustment is needed

‘The following formula will be used for divisor adjustments due to

corporate action (Note: No divisor adjustments are necessary for stock splits, since market capitalization does not change and the share number and share price are adjusted prior to the opening of trading on the split’s ex-date)

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A study on sector index of stock market - proposal for development of FPTS sector index

1.3.3.2 Divisor adjustment formula

Whenever a corporation implements an action that affects its stocks (such as dividend payment, stock split or rights offering etc.), the divisor needs to be adjusted upwards, downwards or remain the same Assuming stockholders receive “B” new stocks for every “A” stocks they own in the following corporate actions:

1 | Cash dividend Py=P; — cash dividend No change

2 | Stock dividend Đ„i=P, *A/(A+B) Qu=Q2(A2B)/A

(similar to stock

split or bonus issue)

3 | Issuance of Pyi=(eA +subseription Qa= Q*(ABYA

additional shares at | price *B)/(A+B)

discount prices to

existing

shareholders)

4 | Purchase of treasury | No change Qu=Q—no of

5 | Sale of treasury ‘No change Qu= Q, + no of

6 _ | Stock issuance No change Qui= Q, + no of new

stock dividend dividend)* A(A+B)

9 | Cashdividendand | Pt+1=[(Pt-cash QII=QP(A+B/A

rights offering dividend)*A+subseription

price *BJ(A+B)

10 | Stock dividend and | Pt+1=(Pt*A+subscription Qt 1=Qt*(A+B+CV/A

rights offering, priee*C)J/(A+B+C)

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A study on sector index of stock market - proposal for development of FPTS sector index

11 ] Cash dividend and | Pt+1=(Pt-cash Qtt1=Qtf(A+B+C)J/A

stock dividend and _ | dividend)*A+subscription

rights offering price*C)/(A+B+C)

Source: FPT Securities Companies, Analysis Department, 2008

1.3.3.3 Timing of divisor adjustments

1 For rights offering and stock dividend

® On the ex-right date, the share price, number of outstanding shares and

divisor will be adjusted based on information about rights exercise,

share price and outstanding shares of the last trading session The

number of outstanding shares is adjusted upwards by the provisional

formula-based number of additional shares

* On the effective listing date of additional shares, the number of

outstanding shares is adjusted again (if there is any difference between

the provisional number of additional shares and the actual number of

additional shares issued) ' according to data provided by HOSE and HASTC

2 For the purchase and sale of treasury stocks

The adjustment date is the date when the corporation announces the

purchase or sale of treasury stocks is completed in accordance with the

registered trading time In case the registered volume of treasury stocks to be

bought/sold is not fully bought/sold on the last day of registered trading time

and the corporation registers to buy/sell the rest, we continue to adjust the

‘Tn reality, the effective listing date of additional shares occurs after the ex-right date

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number of outstanding shares on the last day of this supplementary trading

time pursuant to the corporation’s announcement

1.3.4 Step 4: Index calculation

Equation 1.6: Index calculation formula

I= MY ty

In which

Jy: Index value of day t

D, divisor of the day t A divisor is used to re-base the index to start the

index at the base value

MV; the total market value of the day t

My.=)'R+ O

The value of Q, depends on the weighing scheme of each weighting

method See Step 1: Calculation methods on page 11 above

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Chapter 2: ANALYSIS OF SECTOR INDICES

2.1 Analysis of international sector indices

2.1.1 S&P select industry indices

2.1.1.1 Index Description

The S&P Select Industry Indices are designed to measure the performance of narrow Global Industry Classification Standard (GICS) sub- industries or groups of sub-industries S&P industry indices have base value

of 1000 on December 15, 2000

2.1.1.2 Sector classification system

‘The GICS structure consists of 1) sectors, 24 industry groups, 67 industries and 147 sub- industries Companies are classified primarily based

on revenues; however, carnings and market perception are also considered in classification analysis ‘he GLCS sub-industry level offers the most granular

level of industry definition Therefore, the S&P Select Industry Indices offer

the purest representation ol a particular industry

2.1.1.3 Index membership

Membership is based on a company’s GICS classification, as well as liquidity and market cap requirements To be chgible for an S&P Select Industry Index, companies must rank in the top 90% of their relevant GICS

sub-industry by [loat- adjusted market capilalizalion Those slocks at the top,

whose cumulative market capitalization is less than or equal to 90% of the total float-adyusted market capitalization of the sub-industry, are deemed to qualily

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Membership requirements include:

Market Capitalization: Stocks with a float-adjusted market capitalization above US$ 500 million and meet the liquidity threshold are included in

order of their float- adjusted market capitalization until the stock count

teaches 21 ‘The float-adjusted market capitalization of these stocks must

combine to be at least 90% of the total sub-industry market capitalization

If the index still does not have enough stocks that meet the criteria for

inclusion, the minimum market capitalization requirements may be relaxed

until the other requirements have been sauuslicd,

* Liquidity Constituents must have a liquidity ratio defined by dollar value traded over the previous 12 months divided by average market capitalization over the previous 12 months - greater than 30% The length of time to evaluate liquidity is reduced to available trading

period for IPOs or spin-offs that du not have 12 months of trading

history

* Domicile U.S companies only

Index rebalancing occurs after the closing on the third Friday of the

quartcr ending month The reference date for additions and deletions is after

the closing of the last trading date of the previous month

« Additions No companies are added between rebalancing In the case

of mergers involving at least one index constituent, the merged company will remain in the index if it meets all of the eligibility

requirements The merged company will be added to the index at the

weight of the pre-merger index constituent If both companies involved

in a merger are index constituents, the merged company will be added

at the weight of the company deemed the acquirer in the transaction

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© Deletions A company is deleted from a Select Industry index if the S&P Total Market Index drops the constituent If a constituent deletion causes the number of companies in the relevant index to fall below 21,

no addition will be made to the index until the next rebalancing At that time, the entire index will be rebalanced based on all eligibility criteria, including minimum number of companies

2.1.1.4 Index calculation

The index series is equal-weighted and calculated by the divisor

methodology used in all Standard & Poor’s equity indices,

The initial divisor is set to have a base index value of 1000 on

December 15, 2000 The index value is simply the index market value divided

by the index divisor:

Index Market Value

Index Value = ae

Divisor

a Index Market Value = > (Index Shares); + (Price);

=

In which N is the number of stocks in the index

At the beginning of each quarterly rebalancing, Index Shares are set so

that each constituent has equal weight

K

Index Value; after rebalance = p53) —————

(Price), repatance date

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In which K is an arbitrary or nominal value used to ensure each

company’s “shares” number is derived to establish equal weighting in the

smallest and least-liquid stocks Each industry indices has base value of 100

as of December 31, 1991

Industry indices are constructed by categorizing the component stocks

of the Dow Jones U.S Index into the 10 Industries, 19 Super sectors, 41

Sectors and 114 Subsectors of the Industry Classification Benchmark (ICB) A

separate index is maintained for each group at each of the four levels

Companies are classified into Subsectors, the most specific level of classification, based on their primary source of revenue The Subsectors are

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rolled up into Sectors, which in tum are rolled up into Super seclors and

finally into Industries, the broadest level of classification

The index universe is delined as all stocks traded on Lhe major U.S

stock oxchanges, minus any non-common issues and illquid stocks For each industry index, the top-ranked stocks in tenms of size and liquidity are chosen

from the corresponding sclection list as components

1 The index universe is sorted by free-float market capilalization

tk Stocks in the top 95% of the mdex universe by free-float market capitalization are selected as components of the Dow Jones US Index, skipping stacks that fall within the bottom 1% of the universe by free-float market capitalization and within the bottom 01% of the universe by tumover

The NASDAQ Fimancial-100 Index includes 100 of the largest

financial securities listed on The NASI2AQ Stock Market based on market

capitalization They include companies classified as Financials by the

Industry Classification Benchmark (ICB), which are included within the

NASDAQ Bank, Insurance and Other Finance Indices ‘he Index began on January 31, 1985 at a base value of 250.00

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closed-end funds, convertible debentures, exchange traded funds, preferred

stocks, rights, warrants, units and other derivative sccurities

To be cligible for inclusion in the Index, a security must be listed on

The NASDAQ Stock Market and meet the following criteria:

¢ The sccurity’s U.S listing must be exclusively on the NASDAQ Global

Select Market or the NASDAQ Global Market (unless the security was dually listed on another U.S market prior to January 1, 2004 and has continuously maintained such listing),

® ‘The issuer of the security must be classified according to the Industry

Classification Benchmark (ICB) as Financials;

* ‘The security may not be issued by an issuer currently in bankruptcy proceedings;

* If the issuer of the sccurity is organized under the laws of a yurisdiction outside the U.S then such security must have listed options on a recognized options market in the U.S or be eligible for listed options

trading on a recognized options market in the U.S:

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* The issuer of the security may not have entered into a definitive

agreement or other arrangement which would likely result in the security no longer beimg Index eligible;

« The issuer of the security must have “seasoned” on NASDAQ or

another recognized market (generally, a company is considered to be

seasoned by NASDAQ if it has been

operating history of the spin-off will be considered), and

« Ifa security would otherwise qualify to be in the top 25% of the issues included in the Index by markel capitalization Jor the six prior consecutive month-ends, then a one year “seasoning” criteria would

apply

2.1.3.4, Index calculation

The NASDAQ Financial-100 Index is a market capitalization-weighted index The value of the Index equals the aggregate value of the Index share

weights, also known as the Index Shares, of each of the Index Securities

multiplied by each such security’s last sale price, and divided by the Divisor

of the Index The Divisor serves the purpose of scaling such aggregate value

to a lower order of magnitude which is more desirable for Index reporting purposes If trading in an Index Security is halted while the market is open,

the last traded price for that sccurity is used for ull index compulations until

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trading resumes If trading is halted before the market is open, the previous

day’s last sale price is used ‘The formula for Index value is as follows

Aggregate Adjusted Market Value/l)ivisor

The Index 1s ordinarily calculated without regard to cash dividends on Index securities The Index is calculated during the trading day and is

disseminated every 15 seconds from 09:30:15 to 17:16:00 KT’ through the

NASDAQ Index Dissemination Services (NIDSSM) The closing value of the Index may change up until 17:15:00 KT due to corrections to the last sale price of the Index Securities

2.1.4 MorningStar sector Indices

this date forward ‘The index base market values at inception are 1,000

The Morningstar Sector Structure is a three-tiered classification system

that groups companies engaged in similar lines of business by varying levels

of granularity

The Morningstar sector index family consists of a comprehensive set of

indices that collectively larget 97% coverage of the U.S equity markets The

Morningstar sector index family consists of:

* Abroad market index: Morningstar US Market Index

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* ‘Three Morningstar Super Sector Indices

* 12 Morningstar Industry Sector Indices

Information Economy

10) Software

Hardware Media|

‘Telecommuntcations

teahhcae

‘Consumer Servicos Business Serviews Financed Sarvices|

‘sanutacturing Economy

200 Consumer Geods

310 — tndustrial Materials a1 Energy

FT

Source: MorningSiar, hltp:/vww.morningstarcom!

Figure 2.1: Summary of Morningstar sector index family 2.1.4.3, Index membership

To qualify for inclusion in the Momingstar sector indices, a security

must meet the following criteria

¥ Tt must trade on one of the three major exchanges—the NYSE, AMEX, or NASDAQ exchange

¥ The issuing company’s country of domicile should be the U.S or the issuing company’s primary stock market activities are carried out in the

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¢ Limited partnerships and holding companies

Y Asecurity must be among the top 75% of the companies in the investable universe based on its liquidity score A security’s liquidity score is the

average of its ranks on each of the following measures:

¢ The average monthly trading volume in $US during the six calendar

months immediately prior to reconstitution or, in the case of corporate entities younger than six months, since the security was first issued

(partial month periods are prorated by number of trading days in the

month)

¢ The lowest 2 months’ total trading volume during the six calendar

months immediately prior to reconstitution (the months need not be

=" Base Index value

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The above formulas can be simplified as: Index (1) - MdXDÓ)

Where:

Dt) — divisor at time (f}-B(1)/Base Index Valuc

n — number ofstoeks in the indcx

Pi@= dlosing price of stock i al the Inse date

Qi@y= umber of shares of company i at the base

Pq — - piocofstookiattime (9

Quy — — number of shares of company i at time ()

ca = adjustment factor for the base date market capitalization

t = time the index is calculated

Mit) market capitalization of the index at time (t)

Bi) — adjusted base date market capitalization of the index at time (t)

2

NYSE Scctor Indices

2.1.5.1 Index description and sector classification system

The NYSE Sector Indices are subsets of the NYSE Composite Index and consist of lhree separate indices roprosonting the following market sectors: Energy, Financial, and Health Care Component in each of the three

NYSE Sector Indices include NYSE-listed common stocks that are classified

according to the Dow Jones Global Classification System ‘(hese indices are

Lach of the three NYSE Sector Indices has a base date of December 31,

2002 The closing market valuc on this datc was given an index valuc of 5,000 (December 31, 2002=5,000)

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A company must have its shares listed on the New York Stock Exchange in order to be eligible for inclusion in any of the NYSK Sector

Indices Only common stocks, ADRs, REITs and tracking stocks listed on the

NYSE arc chgible for inclusion, multiple classes of shares can also be

included in the Composite Preferred stocks, closed-end funds, exchange-

traded funds, trust unils, shares of beneficial interest, limited partnerships, and

derivative securities such as warrants and rights arc not cligible

1, Additions

Additions to the NYSE Sector Indices can be a result of new NYSE

listings, IPOs, spin-offs and takeovers New listings and IPOs are added to an NYSE Sector Index at the close of trading on their first day of trading on the

NYSE If an index constituent spins off a portion of its business to form onc

or more new companies, all new companies will be immediately included in the Sector Index If an index constituent merges with another company, the newly formed company becomes a member of the Sector Index after the close

of trading on the effective date of the merger provided it meets the

Tiêu đề	A Study on Sector Index of Stock Market Proposal for Development of FPTS Sector Index
Tác giả	Nguyen Minh Khoi
Người hướng dẫn	Dr. Tran Doan Kim, Tran Phuong Lan, MBA, Ph.D Candidate
Trường học	Vietnam National University, Hanoi School of Business
Chuyên ngành	Business Administration
Thể loại	Thesis
Năm xuất bản	2008
Thành phố	Hanoi

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