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.