A stock market index is a statistical average that measures the value of listed companies on a stock exchange.

It is reported in points, not dollars.

An index is a measurement of the stock market's performance over time.

To determine the performance of an index, whether it has advanced or declined, it must be read comparatively.

An increase or decrease in the index suggests that, on average, the market value of the listed companies has appreciated, or vice versa.

Since the index is an average, it is possible for it to advance, even when some stock prices may have declined.

Therefore, in addition to the value of and change in the index, investors must examine stock prices.

Computation of JSE Index

The index is calculated by dividing the aggregate market capitalisation by a base divisor.

The market capitalisation of each company is the product of its issued shares and its market price.

The Jamaica Stock Exchange (JSE) uses the weighted average market-capitalisation method to calculate the index. The formula to compute the JSE Index is as follows:

∑(Company Issued Share x Market Price) = Total Market Capitalisation

Base Divisor Base Divisor

Given the above, the greater a company's market capitalisation, the greater the weight it carries in the composition of the index.

Based on the above formula, an increase in stock prices will cause 'total market capitalisation' to increase, which will consequently cause the index to advance - and vice versa.

Any change in the total issued share capital on the market will necessitate a recomputation of the base divisor.

In addition to being the denominator in the calculation of the index, the base divisor is a modulator for changes in issued shares.

Such changes may exist in the form of supplemental listings or the listing of shares from a rights issue. In essence, the base divisor changes whenever there is a change in the issued share capital to allow continuity in the index.

The base divisor is also adjusted whenever there is a listing or delisting of a company. The computation of a new base divisor is as follows:

∑New Base Divisor = New Market Capitalisaton

Closing Index

The Four JSE Indices:

All stock exchanges report an index, and some even report more than one. The JSE reports four indices: JSE Market Index, the All Jamaican Composite Index, the JSE Select Index and the JSE Cross Listed Index.

The JSE Index

The JSE Index measures the performance of all the companies that issue ordinary shares.

The All Jamaican Composite

The All Jamaican Composite Index measures the performance of only the Jamaican companies that issue ordinary shares.

The JSE Select Index

The JSE Select Index measures the performance of the 15 most-liquid stocks. Liquidity is determined by the number of days traded over a three-year period, the number of times traded over a three-year period, and total ordinary trades over a three-year period. The JSE Select Index is revised annually.

The JSE Cross Listed Index

The JSE Cross Listed Index measures the performance of the foreign companies' ordinary shares.

Even though the companies comprising the All Jamaican Composite Index, the JSE Select Index and the JSE Cross Listed Index are subsets of companies that form the JSE Index, they do not always move in the same direction as the JSE Index.

It is, therefore, not unusual for the JSE Index to decline while the others advance.

Prepared for Sunday Business by the Market Operations and Trading Department of the Jamaica Stock Exchange.