Stock markets 101: The ins and outs of indexes

Julie Brownlee, Fsp Invest, 06 Nov. 2015

Tags: indexes, what are indexes, how indexes work, index, stock market index, indices



The Johannesburg Stock Exchange is home to around 400 companies. These companies are of different sizes and operate in a range of industries and sectors.

If you want to see how the stock market is performing, looking at the daily performance of 400 companies would be pretty laborious. Instead of having to do this, you can look at the different indexes on the JSE.

So what exactly are indexes? And how do they work?

Let’s take a closer look…



What are indexes?


Indexes (otherwise known as indices) are simply systems of measurement on the stock market.

There are a number of different indexes on the JSE, which measure value depending on each share’s weight of a basket of shares at a particular point in time.

Investors use indexes for different reasons. One of the most common reasons is to measure performance and to estimate what the market’s rate of return is.


Indexes in South Africa


There are a number of indexes, such as the JSE Top 40 Index and the JSE All Share Index.

Take the Top 40 Index. This contains the 40 largest companies on the JSE. The index weights each share according to its size. The stock exchange uses specific formulas to calculate this.

You can look at the broad performance of the stock market using indexes such as the Top 40 Index and the All Share Index. Or you can look at more specific sectors using indexes such as the Gold Mining Index and the Financial 15 Index.

If you watch the financial news of TV, you’ll notice that the performance of the stock market is given by its indexes. This also includes the performance of overseas markets such as the FTSE 100 Index, which is the 100 largest companies listed in the UK.

So there you have it. The ins and outs of indexes.

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