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Foundations

MV Chronicle: Equal Weighted Indexes

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Read the MarketVision Chronicle on a Democratic Nifty – Equal Weighted Indexes:

An Equal Weighted Nifty

 

We’ve all heard of the Sensex and Nifty. There about 30 companies, each of which is part of the index. But they’re not all equal. What the Nifty and Sensex makers do, is to assume that each company’s free-float-market-capitalization must determine the weight it carries in the index.

What the heck is Free Float Market Cap?

The financial domain survives because it continues to inflict unnecessarily complicated terminology on us. Let’s understand this with an example.
There’s a company called Albatross Analytics Ltd. (This is a fictitious company I just invented. Please don’t go look for it). Albatross has 100,000 shares in total, out of which the promoters own 40,000 shares. The share price is Rs. 200.

The Market-Cap of the company is the total value of the company – that is, the total number of shares multiplied by the price. The “Free-Float” is whatever is not in the hands of promoters. Usually promoters don’t sell their stake, so the tradable quantity of shares is only what they don’t own.  So:

 

Three Early Warning Charts

 

Let me stop talking and chart something out for you.
Short Term MAs

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