Wednesday, 17 October 2007

How is STI index being computed?

For those who observe closely on the indexes such as the S&P500, the DJIA, the STI etc., have you ever wonder how these indexes are constructed? There are 3 basic ways to compute these indexes. They are
  1. Price-weighted
  2. Market value-weighted
  3. Unweighted

The returns on a price-weighted index could be matched by purchasing an equal number of shares of each stock represented in the index. Since the index is price-weighted, a
percentage change in a high-priced stock will have a relatively greater effect on the index than the same percentage change in a low priced stock.

A value-weighted index assumes you make a proportionate market value investment in each company in the index. The major problem with a value-weighted index is that firms with greater market capitalization have a greater impact on the index than do firms with lower market capitalization.

An unweighted index places an equal weight on the returns of all index stocks, regardless of their prices or market values. The procedure used to compute an unweighted index value assumes that the index portfolio makes and maintains an equal dollar investment in each stock in the index.

So how is the STI index computed? The STI index like most of the major US index are computed using the value-weighted approach and covers all sectors. As it is value-weighted, the influence of the large capitalisation constituent stocks on the index is moderated by weighting them by their free float percentages.

You can find more information on the STI index by clicking here and other information about other indexes such as the Nikkei 225 Index, MSCI Taiwan Index etc., by clicking here.

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