Financial Index

What is a Stock Market Index?

A stock market index is typically referred to as a stock index. It measures a certain portion of the stock market, such as the change in the share prices of different companies that form part of a specific sector or industry in a country or region.

The index is determined by calculating the prices of certain stocks and it is a tool that is typically used by investors and financial institutions alike to compare their return on investment.

Indices are extremely important because they can be used to manage the portfolios of investors and to follow the financial markets. These indexes are integrated into the investment management business. They are also used by different funds as a benchmark according to which performance can be compared.

As a benchmark, indexes can be used as a performance comparison tool, allowing investors to follow their investments in segments. Investors can diversify their portfolios according to the returns, or expected returns, from certain segments or sectors.

What is the South African Financial Index?

The South African Financial Index consists of 15 of the largest, most prominent financial companies according to their market capitalization. These companies are publicly listed on the Johannesburg Stock Exchange.

The Financial Index consists of the four largest banks in South Africa amongst several other large financial institutions. The Financial Index does not have a set number of companies and has a free-float screening of a minimum of 5%.

Additional screening for the Financial Index refers to companies that are classified under South African Financials ranked according to their gross market capitalization, which means that companies that perform better than others can overtake one another.

The Financial Index is free-float market cap-weighted and the index is reviewed every March and September, making it semi-annual. The Financial Index in South Africa has been in operation since January 2006, and it is one of the main indexes in the country.

At the time of writing, the Financial Index consists of the following companies:

• FirstRand Ltd with a weighting of 17.22%
• Standard Bank Group Ltd with a weighting of 14.90%
• Sanlam Ltd with a weighting of 8.58%
• Capitec Bank Holdings Ltd with a weighting of 7.70%
• Absa Group with a weighting of 6.48%
• Nedbank Group Ltd with a weighting of 6.22%
• Old Mutual Ltd with a weighting of 5.45%
• RMB Holdings Ltd with a weighting of 5.18%
• Discovery Ltd with a weighting of 4.50%
• Investec Ltd with a weighting of 4.23%
• Investec PLC (SA) with a weighting of 4.23%
• Growthpoint Properties Ltd with a weighting of 3.62%
• NEPI Rockcastle PLC with a weighting of 3.55%
• PSG Group Ltd with a weighting of 2.95%
• Redefine Properties Ltd with a weighting of 2.78%
• Reinet Investments SCA with a weighting of 2.43%

Why Should You Trade the South African Financial Index?

The South African Financial Index is the best tradable instrument that offers traders exposure to 15 of the largest financial counters that are locally listed. This index can be used by traders and investors to speculate either long or short on the financial industry in South Africa.

These companies’ fortunes are linked to the overall South African economy, and they subsequently reflect the strength, or weakness, thereof. Investors who have long-term investments in financial companies must consider that a cost-effective way to hedge the underlying equity portfolio, referring especially to the spreads and the commissions.

These indices can be traded through an online trading broker or a financial service provider that offers access to the JSE. South African Indices can be traded from 9 am to 4:50 pm from Monday to Friday, South African Standard Time (SAST). This excludes public holidays.

Investors and traders must note that from 4:50 pm to 5 pm, indexes cannot be traded, including both stops and limits, because the underlying share constituents go into auction during this time.

At 5 pm SAST, the Financial Index adjusts according to the appropriate Index which is influenced by the closing prices of the share constituents of the indices’ auction.

How does the financial sector contribute to the economy of South Africa?

The financial sector in South Africa consists of the following:

• Banking
• Insurance
• Asset Management
• Securities Market
• Life Assurance and Pensions
• Regulated Advice
• International Activities, and several others

The financial sector in South Africa has sound support from an effective regulatory and legal framework. The South African framework is not only sophisticated, but it also boasts of several domestic and foreign institutions that provide many different products and services.

The banking system of South Africa is well-developed, and it has strict regulations. South Africa’s central bank, the South African Reserve Bank, works alongside several other key players that include financially strong banks, investment institutions, and several other smaller-cap banks.

Several foreign banks have established offices in South Africa. The most competitive front in the financial industry remains the investment and merchant banking sectors.

The economy of South Africa is a middle-income and emerging market that has abundant natural resources. In addition to this, the Johannesburg Stock Exchange is one of the largest in Africa and it also falls among the top 20 stock exchanges globally.

The economy of South Africa is based on private enterprise, but there is active participation from the State. The overall economic policy of South Africa surrounds sustainable growth and achieving self-sufficiency.

Risks involved with investing in the Financial Index

• Market Risk refers to the risk that the overall investment will depreciate because of unforeseen economic circumstances or any other events that could affect the market conditions. Market risk can be broken down into interest rate risk, equity risk, and currency risk
• Liquidity risk refers to situations where the investor cannot sell their investment because there is not enough demand for the asset or share.
• Concentration risk refers to the risk of loss when the investor invests a large portion of capital into a single share, industry, or sector.
• Credit risk refers to the investment issuer failing to fulfill its financial obligations.
• Inflation risk involves losing purchase power because the investment cannot keep up with inflation.
• Horizon risk refers to the investor’s investment horizon being shortened due to unforeseen events, such as unemployment.