Friday, August 20, 2010

Share market indices - measuring the market

An understanding of the language of the sharemarket is essential if you wish to properly communicate with your adviser and/or benefit from the market information available to you. For example you may have heard on the news such as the following:

"After a slow start, turnover on the sharemarket was strong today, with the All Ords finishing up 23 points to 5,300. On overseas markets, the Dow Jones rose slightly to 11,340."

What does that really mean? Listeners are being given an indication as to the general trend of the sharemarket both in Australia and in the USA. The "All Ords" and "Dow Jones" are an index.

An index is simply a measure of performance over time. A sharemarket index is a measure in the change in price of a basket of shares. The number of shares in the basket will determine how closely the index represents the entire market.

The concept of an index is not only used in the sharemarket. A widely followed index is inflation. Inflation is the change in price of a basket of goods. This is measured by the Consumer Price Index – CPI.

The All Ords

The All Ordinaries or All Ords is a measure of the overall performance of the Australian sharemarket at any given point in time. It is made up of the share prices for 500 of the largest companies.

The companies are weighted according to their size in terms of market capitalisation (total number of shares on issue multiplied by the share price). For example, Telstra and National Australia Bank have very large market capitalisations and represent a large component of the All Ords. Movements in their share price have a marked effect on the level of the All Ords index.

The All Ords does not include the value of any dividends paid to shareholders and therefore does not reflect the total returns made from sharemarket investments during that period. An index that takes into account both price movements and dividends is called an accumulation index.

Standard&Poor’s Index Services

Standard & Poor’s (S&P) Index Services provides the index calculation services for the Australian sharemarket.

While the All Ordinaries has been a popular index for many years, the main index used in the Australian market is the S&P/ASX 200 index. It is recognised as the investable benchmark for the Australian equity market. It addresses the needs of investment managers to benchmark against a portfolio characterised by sufficient size and liquidity. The S&P/ASX 200 is comprised of the S&P/ASX 100 plus an additional 100 stocks. It forms the basis for the SPI 200 and the ASX mini200 futures contract, and the SPDR S&P/ASX 200 exchange-traded fund.

International indices

Indices are used to benchmark sharemarkets all around the world, with the most well known being the Dow Jones Index, a share price index that measures the market prices of the top companies listed on the New York Stock Exchange.

In London, the Financial Times Stock Exchange Index, better known as the FTSE 100 or 'the Footsie', lists the 100 largest public companies traded on the London Stock Exchange.

The Hang Seng is the principal Hong Kong share price index. The main market barometer in Japan is the Nikkei Dow Index which covers the top 225 shares listed on the Tokyo Stock Exchange.

The German Stock Exchange Dax 30 (covering 30 blue chip stocks) is unusual in that it is an Accumulation Index, whereas all the others are price indices, meaning they do not include dividends.