S&P CNX Nifty – Frequently Asked Questions
1.  What should a stock market index be?
2.  What do the ups and downs of an index mean?
3.  What is the basic idea in an index?
4.  What kind of averaging is done?
5.  What is the portfolio interpretation of index movements?
6.  Why are indexes important?
7.  What kinds of indexes exist?
Index construction
1.  Isn’t averaging like diversification; cancelling out vulnerability to one stock?
2.  Then a larger number of stocks in an index will give more diversification — isn’t that
a good thing? Why don’t we put all the stocks of the country into the index?
Component illiquidity contaminates index
1.  What is wrong with the price information for illiquid stocks?
2.  A stock may be liquid on one exchange and illiquid on another — what price do you
take when calculating the index?
3.  What is `stale prices’?
4.  What is `bid-ask bounce’?
5.  What about market manipulation  – how would manipulation of an index take place,
and how would an index be made less vulnerable to manipulation?
6.  So diversification yields diminishing returns, and illiquid stocks are best kept out of
an index…. what is the ideal middle road?
The S&P CNX Nifty
1.  How does the S&P CNX Nifty work?
2.  What is `impact cost’?
3.  What do you mean by `an S&P CNX Nifty trade’?
4.  What’s the impact cost on Rs.3 million of the full S&P CNX Nifty?
Index revision
1.  Why does the index keep changing from time to time?
2.  When a stock goes out and a new stock comes in, doesn’t that make index levels non-
3.  Index revision sounds dangerous in terms of political pressures. Won’t speculators try
to push a stock they have purchased into the index? Or remove a stock from the index
when they are shorting it?
High quality information
1.  How is the S&P CNX Nifty closing price calculated?
2.  What is special about the NSE closing price?
3.  What about dividends?