What is a financial index?

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EXPLAINER | What is a financial index?

A financial index is a basket of securities or other financial instruments that measures the performance of a market, asset class, sector or investment strategy.The weight of shares in a capped index is limited. This means funds that track or benchmark to the index are not overexposed to certain shares.

Investors cannot invest directly in an index, but they can invest in a fund or portfolio that tracks or replicates the components of an index. Indices are also a valuable tool for the managers of, and investors in, actively managed funds or portfolios, as they provide the benchmark against which these investments are measured. This comparison is key to understanding a portfolio's performance.

Companies that are listed on more than one stock exchange – known as dual-listed shares - make only a portion of their shares available for trade on each market. The JSE has a number of shares that are listed on the other markets. Indices were adapted to take this into account. The Shareholder Weighted Index series was developed to exclude shares not available for trade on the South African market.

Because buying a portfolio of shares that fully represents the ALSI is not very cost-effective, especially for a smaller investor, the JSE introduced the so-called tradable indices, such as the JSE Top40 Index.

 

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