Why you shouldn’t just follow the Top 40 and the All Share indexes

Julie Brownlee, Fsp Invest, 18 Mar. 2014

Tags: indexes, jse, johannesburg stock exchange, top 40 index, all shares index, stock market, stocks, shares, companies, indices, investing, investment, market,

Do you like following the market’s ups and downs on a daily basis? Chances are if you do, you’ll watch what the All Share Index and the Top 40 Index are up to. But you should look at other indexes too. By doing this, you’ll get a better understanding of what’s going on in the market. Let’s take a closer look at the benefits of taking this broader approach…

Are you focusing all your attention on the WRONG index?

When it comes down to the performance of the Johannesburg Stock Exchange, many investors focus on only one or two indexes, Chris Rowe in Investment U explains…

If you think you know what’s going on in the market just by looking at the Top 40 Index for instance, you’d be wrong.

The Top 40 represents the 40 biggest companies on the JSE. And it isn’t an indication of what’s happening in the entire stock market.

This is because of the weighting structure of the major indexes. So it’s possible for other sectors or companies to perform very well, but not reflect in the Top 40.

A major index like the Top 40 can mask significant strength or weakness in other shares.

It’s a good idea to start paying attention to the performance of small-cap, mid-caps and large-caps. This will give you a clearer understanding of the stock market.

And it’s a great way to uncover new trends in a faster way.

For instance, shares of smaller companies tend to lead the shares of larger companies. So if small-cap shares start to show signs of weakness while the large-caps are still advancing but fizzling out, it might be a sign of trouble ahead.

Spend time looking at the performance of a variety of different indexes

You should get in the habit of viewing different market indexes and understand their make-up. For instance, look at:

  • The Top 40 Index;
  • The Small-Cap Index;
  • The Mid-Cap Index;
  • The Large-Cap Index;
  • The Industrials Index;
  • The General Retailers Index;
  • The Financial Index; and
  • The Mining Index.

By looking at a variety of different indexes and how they perform, you’ll be able to see which areas of the market are performing and which aren’t. You can see where the market is at its strongest.

If you’re looking to buy shares, this can give you a good insight into what the market is doing and which sector is doing well. Then you can research why different indexes are performing or not. All in all giving you a better understanding of what’s going on in the market.

So there you have it, why you shouldn’t just follow the Top 40 and the All Share indexes.

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