Equity indices

　　You should be familiar with the major equity indices such as the Dow Jones Industrial Average(DJIA), Standard & Poor 500 (S&P500), Standard & Poor 400 (S&P400), Nasdaq 100, Russell 1000, and Morgan Stanley Capital International (MSCI) indices. With economic globalization, seamless capital flow, technology interconnectivity such as Electronic Communication Networks(ECNs) and cross-border stock exchange trading platforms, you should also be familiar with leading stock indices of major exchanges around the world.

　　The following is a list of some of the key global equity indices:

　　So what are some of the basic knowledge and concepts on equity indices that you should equip yourself with? We examine these knowledge in the context of the S&P 500 Index, the most widely used benchmarks of US equity performance.

　　Is the index capitalization weighted or price weighted?

　　The S&P 500 is a capitalization-weighted index(this is calculated as the current stock price times the number of shares outstanding) whereas the DJIA is price-weighted.For a price-weighted index, constituent stocks with higher price will have a lager impact on the index than constituent stocks with lower price.

　　How many constituents form the index?

　　There are 500 constituent stocks in the S&P 500, and 30 constituent stocks in DJIA.

　　What was the historical high and low of the index and when (month, year) did this happen?

　　S&P 500 hit an all time high of 1527 in March 2000, and DJIA’s recent high was achieved in January 2002, where it closed at 11,723.

　　This knowledge provides you with a historical perspective, especially when the market has gone through bear market corrections.

　　What are the 52-week high and low?

　　At the time of this writing, the 52-week high and low are 1199 and 842 respectively for the S&P 500, and 10,600 and 7,700 for the DJIA.

　　It is customary for people in the financial industry to keep a perspective of the 52-week period high and low instead of calendar year.

　　What is the market capitalization represented by the index? And what is the figure of the capitalization as a percentage of the GDP?

　　As of July 31, 2002, the total market value of S&P 500 is US$8.4 trillion. The U.S. GDP is approximately US$10 trillion, thus the market capitalization is 84% of the GDP.

　　What is the Price to Earning (P/E) ratio based on current year earning estimated and what is the historical average P/E ratio for the S&P 500 index?

　　Since World War II, the actual P/E ratio of the S&P 500 Index has been as low as 7 (reached in the late 1940s and again during the 1974-1981 period, when inflation depressed the value of future earnings) while reaching a peak of nearly 23 in 1961. Prior to the October 1987 stock market crash, the P/E ratio for the S&P 500 was above 20, but in recent years, the ratio has averaged higher. At the end of 1998, the P/E ratio for the Index was a record year end high of 32.27 (based on actual trailing 12-month earnings).

　　What is the dividend yield for the S&P 500 index?

　　The current dividend yield for the S&P 500 index is indicatively at 1.72%. Historically, since World War II, indicative dividend yields for the S&P500 have ranged as high as 8.69% in 1942. Between 1962 and 1994, the average indicated dividend yield for the S&P 500 Index was approximately 4%. However, the bull markets in the 1990s drove yields down to unprecedented low levels. At year end 1998, the indicated dividend yield for the S&P 500 Index was mere 1.34%, a record year end low.

　　What is the earnings growth rate forecast for the S&P 500 index?

　　The historical growth rate of the S&P 500 index is depicted in the graph below.

　　S&P 500 Long Term Consensus Earnings Growth Rate

　　For those who are seeking more advance knowledge, the following are some additional questions that will set you apart from the crowd:

　　How many industry sectors are represented in the index? What are they?

　　Ten industry sectors are represented in the S&P 500 Index, they are: Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrial, Information Technology, Materials, Telecommunication Services and Utilities.

　　What are the relative weightings (percentage) of the major sectors represented in the index?

　　The major industry sectors are the following:

　　What are the differences between indices such as the S&P 500 and S&P 400?

　　The S&P 400 represents the Mid-Cap stocks in America, whereas the S&P 500 represents the Big-Cap stocks. The companies chosen for the S&P 500 generally have the largest market value within their industry. The other key difference between the two indices is there are no financial stocks in the S&P 400 index.

　　What are the rules for adjustments of the component stocks in the index?

　　Maintaining the S&P 500 Index includes monitoring and completing the adjustments for company additions and deletions, share changes, stock splits, stock dividends, and stock price adjustments due to restructurings or spin-offs. Some corporate actions, such as stock splits and stock dividends, require simple changes in the common shares outstanding and the stock prices of the companies in the Index. Other corporate actions, such as share issuances, change the market value of the Index and require an Index Divisor adjustment to prevent the value of the Index from changing due to the corporate action.

　　Adjusting the Index Divisor for a change in market value leaves the value of the S&P 500 Index unaffected by the corporate action. This helps keep the value of the Index accurate as a barometer of stock market performance and ensures that the movement of the Index does not reflect the corporate actions of the companies in the Index. All Divisor adjustments are made after trading hours and after the calculation of the closing value of the S&P 500 Index. Any change in the S&P 500 Index Divisor also affects the corresponding Standard & Poor’s major industry sector, economic sector, and individual industry group divisors.

　　The following table summarizes the types of S&P 500 Index maintenance adjustments and indicates whether a divisor adjustment is required.

　　S&P 500 -TYPES OF MAINTENANCE ADJUSTMENTS