Stock Market Indexes

by Mr. Cheap

In a The Toronto Star on August 23rd they wrote:

“Markets started off strong but Toronto’s S&P/TSX composite index ended the session down 12.03 points to 13,451.11 after jumping about 600 points in the last four sessions”

What does this mean? I understand that the index being DOWN is bad, but what does 12.03 point mean? How does this relate to 13.4K points? What’s a point?

To start with the easy stuff, a session is simply a day of trading, so that last four sessions just means the last four TRADING days (like work days, ignore weekends). Have a look here and you’ll see that the TSX opened at 12,848.700 on August 17th, and closed at 13,463.140 on August 22nd (600 points in 4 days).

Point seems to be one of those words that gets HORRIBLY overloaded to the point that you just scratch your head and wonder why different areas don’t pick a new word and clarify what they mean.

With loans, a point is 1/100 of a %. So if you a mortgage broker promised “I can get you 20 points off of what the big banks are offering” they’re saying they’ll get you a loan at 0.2% less (say 5.69% instead of 5.89%).

With individual stocks, a point is 1 dollar. So when I say “There were 9 points between the cheapest and the most expensive that I bought BMO” I’m saying that at one point I paid $9 / share more. I wouldn’t actually say that, because it seem pretentious and would confuse people. I’d ACTUALLY say “There was $9 between the cheapest and the most expensive that I bought BMO”. I’m weird that I like it when people actually understand what I say or write.

An index is simply a collection of companies who’s value is tracked in the aggregate. Say I was very interested in Canadian banks (I am). There may be value for me to know, on a day-to-day basis, how much the value of the big 6 banks have changed all together (perhaps I don’t care about their individual changes). Say each bank went up by $2, this new index would go up by $12 (the sum of the changes). A “big six Canadian banks” index would be something that tracks this.

With indices the change is basically how much more (or less) it would have cost to buy a single share of every stock in the index. So when the index drops 10 points, it means you could buy the entire index for $10 less then the day before. If the index climbs 600 points, that means the entire index would cost you $600 more. In the example above, my big-banks index climbs 12 points (since buying a single share of each of the 6 banks costs $12 more, $2 each, then it did the day before).

Clearly this only makes sense when you consider the composition of the index. An index made up of 30 stocks increasing 600 points would be an average gain of $20 / stock. An index made up of 300 stocks increasing 600 points would be an average gain of $2 / stock.

A (perhaps better) explanation is available here.

The meaning of the index being worth 13,451.11 is beyond me. Historically, older indicies would be based on the value of all the shares, and splits caused problems for maintianing the meaning of the index value (since after a split the stock would be worth half of what it was worth before). According to Mike, more recently introduced indicies are weighted according to market capitalization value. What the actually meaning of this number is though, is still quite obscure to me, but apparently through using a divisor and or some formula, you can use it to calculate the value of the companies making up the index is a convoluted way.

Why don’t they just express it as a percentage (“the market closed 2% higher at the end of trading today compared to the start”) and keep things clear for everyone is beyond me. Does everyone else have a clearer understanding of what points and index values mean than I do? Is there any extra info it gives that simply providing the % increase or decrease wouldn’t?

This is why I don’t try to calculate valuations on my own :-). My apologies if I’ve written anything incorrect here (please don’t take this as gospel).

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{ 1 comment… read it below or add one }

1 Joseph

It is a bit confusing indeed. Both averages and indexes exist today. Good examples of both are the Dow Jones Industrial Average which is typically what you hear reported from Wall Street.

That being said the S&P 500 is the weighted index which is what most professional traders use as a more accurate reflection of the movement of the overall market.

In an Average higher “priced” stocks affect the total.
In an Index higher “capitalized” stocks affect the total.

Not sure if this helps or not…just thought I’d mention it. Cheers!

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