FTSE Bursa Malaysia Index: Explained
BY TIO Staff
|July 12, 2024The FTSE Bursa Malaysia Index is a comprehensive benchmark that tracks the performance of the Malaysian stock market. It is a joint venture between FTSE Group, a UK-based index provider, and Bursa Malaysia, the nation's stock exchange. This index is widely used by investors and traders around the world to gauge the health of the Malaysian economy and to make informed investment decisions.
Understanding the FTSE Bursa Malaysia Index is crucial for anyone interested in trading or investing in Malaysian stocks. It provides a snapshot of the country's economic health, reflecting the performance of the largest and most liquid companies listed on Bursa Malaysia. This article will delve into the intricacies of the FTSE Bursa Malaysia Index, explaining its composition, calculation, and significance in the world of trading.
The Composition of the FTSE Bursa Malaysia Index
The FTSE Bursa Malaysia Index is made up of several sub-indices that represent different sectors of the Malaysian economy. These sub-indices include the FTSE Bursa Malaysia Top 100 Index, the FTSE Bursa Malaysia 70 Index, and the FTSE Bursa Malaysia Small Cap Index, among others. Each of these sub-indices tracks the performance of a specific segment of the market, providing a detailed picture of the Malaysian economy.
The companies included in these sub-indices are selected based on their market capitalization, liquidity, and other eligibility criteria. The index is rebalanced semi-annually, ensuring that it accurately reflects the current state of the market. This process involves adding or removing companies from the index based on changes in their market capitalization or other factors.
Market Capitalization Weighting
The FTSE Bursa Malaysia Index uses a market capitalization weighting methodology. This means that companies with a larger market capitalization have a greater impact on the index's value. This approach ensures that the index accurately reflects the performance of the largest and most influential companies in the Malaysian market.
Market capitalization is calculated by multiplying a company's share price by the number of its outstanding shares. It represents the total market value of a company's equity and is a commonly used measure of a company's size. In the context of the FTSE Bursa Malaysia Index, a company with a larger market capitalization will have a greater influence on the index's value than a smaller company.
Liquidity Criteria
Liquidity is another important factor in the composition of the FTSE Bursa Malaysia Index. To be included in the index, a company must meet certain liquidity criteria. This ensures that the index is composed of companies that are actively traded on the market, making it a reliable benchmark for investors and traders.
The liquidity of a stock is determined by the volume of its shares that are traded on the market. A stock with high liquidity is easy to buy or sell without causing a significant change in its price. On the other hand, a stock with low liquidity may be difficult to trade without affecting its price. In the context of the FTSE Bursa Malaysia Index, only stocks with sufficient liquidity are included in the index.
The Calculation of the FTSE Bursa Malaysia Index
The FTSE Bursa Malaysia Index is calculated using a base value and a divisor. The base value is an arbitrary number that is set when the index is first established. The divisor is a factor that is used to maintain the continuity of the index's value when its composition changes.
The value of the index is calculated by dividing the total market capitalization of the companies in the index by the divisor. This calculation is performed in real-time throughout the trading day, providing a continuously updated measure of the market's performance. The index's value is typically reported as a point value, which represents the percentage change in the index's value relative to its base value.
Base Value and Divisor
The base value of the FTSE Bursa Malaysia Index is set at an arbitrary level when the index is first established. This base value serves as a reference point against which the index's performance is measured. For example, if the index's base value is 1000 points and the index's current value is 1500 points, this means that the index has increased by 50% since it was established.
The divisor is a factor that is used to maintain the continuity of the index's value when its composition changes. When a company is added or removed from the index, the divisor is adjusted to ensure that the index's value does not change as a result of the change in composition. This ensures that the index's value reflects the performance of the market, rather than changes in the index's composition.
Real-Time Calculation
The FTSE Bursa Malaysia Index is calculated in real-time throughout the trading day. This means that the index's value is continuously updated to reflect the current market conditions. This real-time calculation provides investors and traders with a timely measure of the market's performance, enabling them to make informed decisions.
The real-time calculation of the index is based on the current market prices of the companies in the index. As these prices change throughout the trading day, the index's value is recalculated to reflect these changes. This ensures that the index accurately reflects the current state of the market at any given time.
The Significance of the FTSE Bursa Malaysia Index in Trading
The FTSE Bursa Malaysia Index plays a crucial role in the world of trading. It serves as a benchmark for investors and traders, providing a measure of the overall performance of the Malaysian market. By tracking the index, traders can gain insights into the health of the economy and make informed investment decisions.
The index also serves as the underlying asset for various financial products, including exchange-traded funds (ETFs) and futures contracts. These products allow traders to gain exposure to the Malaysian market without having to buy or sell individual stocks. This makes the index a versatile tool for a wide range of trading strategies.
Benchmark for Investors and Traders
The FTSE Bursa Malaysia Index is widely used as a benchmark by investors and traders. By comparing the performance of their portfolio to the index, traders can assess whether they are outperforming or underperforming the market. This can help them evaluate their trading strategy and make necessary adjustments.
The index also provides a measure of the overall health of the Malaysian economy. By tracking the index, traders can gain insights into the performance of the country's largest and most influential companies. This can help them identify trends and opportunities in the market.
Underlying Asset for Financial Products
The FTSE Bursa Malaysia Index serves as the underlying asset for various financial products, including ETFs and futures contracts. These products allow traders to gain exposure to the Malaysian market without having to buy or sell individual stocks.
ETFs that track the FTSE Bursa Malaysia Index allow traders to invest in a diversified portfolio of Malaysian stocks with a single transaction. Futures contracts based on the index allow traders to speculate on the future direction of the market. These products make the index a versatile tool for a wide range of trading strategies.
Conclusion
The FTSE Bursa Malaysia Index is a crucial tool for anyone interested in trading or investing in the Malaysian market. It provides a comprehensive measure of the market's performance, reflecting the health of the country's economy. Understanding the index's composition, calculation, and significance in trading can help traders make informed investment decisions.
Whether you are a seasoned trader or a beginner, the FTSE Bursa Malaysia Index can provide valuable insights into the Malaysian market. By tracking the index, you can stay informed about the market's performance and identify potential trading opportunities. So, delve into the world of trading with the FTSE Bursa Malaysia Index and explore the vibrant Malaysian market.
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