Sunday, February 15, 2009

Did you know that the STI and Dow Jones are calculated differently?

STI is calculated base on the weightage of the market capitalization of the individual stocks that constitutes the index. This means that a company that is bigger ( in market capitalization), would have more influence on the index. For example, for example a fall of 10% in the price of DBS would cause the STI index to drop more than a 10% drop in a smaller company, say start hub.

However in the case of the Dow Jones. It is price weighted. This means that stocks that have a higher absoulte price carry a heavier weightage in the index. This has raised an issue on whether the Dow Jones is artificially supported. This is because bank stocks used to be very expensive.
After the large drop over the last few months, where the absolute stock price could have dropped from USD70 to the present USD3 causing a large drop in the Dow Jones index.But because the price is presently very low, even with extreme bad news in the financial sector, a drop from USD3 to USD 1, is not going to impact the index very much.

Hence, due to the fact that quite a lot of traders look the Dow Jones index while trading in the Singapore market, they might come under the false impression that the US economy has reach a support. And this might influence their decision on the present state of Singapore's stock market.

Therefore, if you do really want to trade/invest/time the Singapore stock market. It is also important to the look at the individual US stock components, as the Dow Jones might not be a very accurate way to judge the US economy.


chris said...

So how do I calculate sti from the 30 components stocks with market capitalisation to factor in, can you tell me.
I had a little formula but at least 3(s,f,c)x30=90 parameters plus 1(d) are unknown for each of these 30 stocks, presuming no currecy exchange ratio are required ( no USD or other currencies in these 30 stocks).
Indx= (sum 0f 30 components' product of p.e.s.f.c) divided by d, a divisor where p= price, e=1 for local currency stocks, s=share in issue, f=free float factor, c=capping factor. Where can I get these 3 paramrters for each company and d info for free to do a simple calc!!!.


The dow jones is totally out of date. It represents just 30 companies and their not weighted evenly.

Gan Xu said...

In mathematics or physics, if the definition of a quantity changes, its value will change accordingly. Now to the calculation of STI, I always wonder when the components of STI changes like what happened in its history many times, how can the value of the index keep its continuity, meaning no sudden jump (up or down) in its value?

Thanks in advance for anyone who can help clarify this question in my mind for a long time.