Indices are basically indexes which are used by the stock market where they are calculated based on the several different stocks and players of the specific market. In Malaysia, the stock market index is managed and reported through Bursa Malaysia. The word indices is used to portray more than one index where naturally, they are the benchmarks of the performance of the portfolios.
There are certain investment funds which are managed to provide analysts and investors with the performance mirror of the stock market index and in some cases a certain sector in them. For instance, the CPI or Consumer Price Index is reported to tell you how have retail prices for consumer products changed for a certain period.
As investors, an index is a necessary tool which you can use to measure the performance of a group of stocks from a specific market and in most cases, the main stock market under Bursa. Stocks which are used to form the index are also a prestigious status which could gain much confidence from its investors and shareholders. There are a few classes of indices in a stock market where you would come across a broad-based index which will basically represent the stock market as a whole which is usually used by investors on their sentiments of the current economy. Bursa Malaysia uses the FBM-KLCI which is made up of stocks of large companies listed on its Main Markets. The other common indices from other countries include the Japanese Nikkei 225, the America Dow Jones Industrial Average and the British FTSE 100.
Generally, the FBM-KLCI has been developed over the past 2 decades where it is now more than merely an indicator of the Malaysian economy. It has since been enhanced to have more technical functions where it is now calculated using the market capitalisation weighted method where the total value of the listed companies’ shares based on the market prices are used.
The FBM- KLCI stands for FTSE Bursa Malaysia Kuala Lumpur Composite Index and it is considered as an international and standardised way of portraying the market on a daily basis. The FTSE is the index partner of Bursa Malaysia where the index have adopted an international calculation methodology which will be able to portray the true value of the economy to investors and shareholders.
The FBM-KLCI is basically the market barometer where it is made up of the primary market movers and are specifically selected and evaluated to represent the stock market of Malaysia. It is calculated based on the method where free float and liquidity screen are emphasized so that the market can be clearly represented and portrayed. 30 stocks are used to calculate the constantly varying FBM-KLCI and this is such in order for the index to be managed easier.
The frequency of calculating the index have been changed recently from 60 seconds to 15 seconds and this is done so to provide a refreshed outlook of the market in a shorter interval and the historical movements of the stock market of Malaysia can be preserved through the continuity of the value of the FBM-KLCI index.
As mentioned, the FBM-KLCI is derived from the 30 largest companies listed on the Main Board of Bursa Malaysia where their full market capitalisation are used and they must fully meet the Ground Rules stipulated by the FTSE Bursa Malaysia which will involve free float and liquidity elements.
For Free Float, each of the companies selected must have a 15% minimum of shares on the free float basis that must not include restricted shareholding that covers the likes of any significant long term holdings owned by the founders, their families or directors, cross holdings, restricted share schemes for the employees as well as any portfolio investments subjected to a lock in clause or any government holdings. Factors in the free float element must adhere to the banding as specific in the Ground Rules of FTSE Bursa Malaysia of the market capitalisation of each of the 30 companies selected.
Meanwhile, the liquidity element here is evaluated where the stocks of the particular company must be liquid enough in order to be traded where it is calculated based on the median daily trading of each month of the particular company.