A lot of stock market traders and investors were celebrating last April 2013 when the Philippine Stock Exchange Composite Index breached the 7,000 mark.
But what exactly is the PSE Composite Index and why is it important to know its performance? I’ll try to explain this today, and I hope you find it easy to understand.
Did you know that I still remember the time when the PSE Composite Index was still called PHISIX?
When I first heard it mentioned in the news, I thought the TV news anchor was referring to “Physics” – and since that was one of my favorite subjects in high school, I got curious and tried to know what it was all about.
Later on, I realized that PHISIX, or the PSEi as it is now called, is the main stock market index of the Philippine Stock Exchange.
What is an index?
My dictionary at home defines an index as something that serves to guide, point out, or otherwise facilitate a reference.
The index of a book, for example, is a list of all the other books and research work that the author used or cited in writing his book.
Meanwhile, your forefinger (the finger next to your thumb), is also called the index finger, because it’s what you primarily use to point at objects.
In finance, an index is a combination of both. In short, the PSEi is a list and a pointer.
The PSEi is composed of the 30 “biggest” public companies in the Philippines. The term “biggest” doesn’t necessarily mean the “richest” – but based on a set of criteria that the Philippine Stock Exchange defined.
The PSEi is composed of the following companies (starting September 16, 2013):
- Ayala Corporation (AC)
- Aboitiz Equity Ventures (AEV)
- Alliance Global Group, Inc. (AGI)
- Ayala Land, Inc. (ALI)
- Aboitiz Power Corp. (AP)
- Banco de Oro Unibank, Inc. (BDO)
- Bank of the Philippine Islands (BPI)
- Bloomberry Resorts Corporation (BLOOM)
- DMCI Holdings, Inc. (DMC)
- Energy Development Corporation (EDC)
- First Gen Corporation (FGEN)
- Globe Telecom, Inc. (GLO)
- GT Capital Holdings (GTCAP)
- International Container Terminal Services Inc. (ICT)
- Jollibee Foods Corporation (JFC)
- JG Summit Holdings, Inc. (JGS)
- LT Group Inc. (LTG)
- Metropolitan Bank and Trust Company (MBT)
- Megaworld Corporation (MEG)
- Metro Pacific Investments Corporation (MPI)
- Manila Water Company, Inc. (MWC)
- Petron Corporation (PCOR)
- Philex Mining Corporation (PX)
- Robinsons Land Corporation (RLC)
- Semirara Mining Corporation (SCC)
- SM Investments Corporation (SM)
- San Miguel Corporation (SMC)
- SM Prime Holdings (SMPH)
- Philippine Long Distance Telephone Company “Common” (TEL)
- Universal Robina Corporation (URC)
Many believe that the PSEi is a good indicator of the general state of the Philippine economy. Simply, the higher it is, then the better our country’s economy is.
The PSEi is calculated using the formula below (from the PSE Index Guide):
Why Is Knowing About Indices Important?
No need to understand how the formula above works. Even I don’t understand it fully. But you should know that the Philippine Stock Market currently has eight indices:
- PSE All Shares Index (ALL)
- PSE Composite Index (PSEi)
- PSE Financials Index (FIN)
- PSE Holding Firms Index (HDG)
- PSE Industrial Index (IND)
- PSE Mining and Oil Index (M-O)
- PSE Property Index (PRO)
- PSE Services Index (SVC)
If for example, the PRO is going up, then you know that the property sector of the country is doing well – which means investing in real estate could be a good idea.
And of course, as in the case of the PSEi, if it’s going up, then it means the general economy of the country is doing good – which means it might be a good time to start investing (although I believe it’s always a good time to invest).
Lastly, and the reason why I wrote this post, is because Indices are the most common basis of Exchange Traded Funds or ETFs.
What are ETFs? It’s an investment instrument that will soon make a debut in the Philippine market by September 2013, courtesy of First Metro Investment Corp.
I’ll write more about Exchange Traded Funds and explain how it works in the coming days, so be sure not to miss that by subscribing to Ready To Be Rich.
This post is now part of the series, How To Invest In The Stock Market.
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