Posted at 7:00 a.m.
When we say that the S&P/TSX has lost a point, what does that mean? What does the value of a point represent?
Minh Van Tran
Launched in 1977, the S&P/TSX Composite Index represents the performance of Canadian companies in the local stock market. This is the main indicator of the Toronto Stock Exchange. We refer to it to follow the stock market activity of the Canadian stock market.
“We tend to mix up the stock market and the economy: they are two different things that don’t always go in the same direction,” says Gabriel Asselin, financial advisor at Medici Strategic Portfolio Management. .
The S&P/TSX Composite Index tells us whether the stock price of Canadian companies has risen or fallen, explains the specialist. It’s a “snapshot” of the state of the stock market at a specific time that is continually updated, he notes.
If the index rose by 1%, this means that the shares of Canadian companies rose by 1% on average, points out Gabriel Asselin.
The S&P/TSX Composite Index is a bit like a school report. It represents the class average.
Gabriel Asselin, Financial Advisor at Medici Strategic Portfolio Management
It includes 238 Canadian companies, including banks and energy companies that cover 95% of the country’s equity market. Among the largest components are the Royal Bank of Canada and Enbridge. There is a similar index in the United States, the S&P 500, which, for its part, covers 80% of the American stock market.
The point system
Parameters must be respected by Canadian companies to be among the components of the main index of the Toronto Stock Exchange: in particular, they must have a minimum stock turnover rate of 0.5 and represent no less than 0.04% of the total index market capitalization weight.
The S&P/TSX is revalued every three months. Companies can be removed from the index if they do not meet the required criteria.
To date, the value of all the components of the S&P/TSX amounts to 3,245.7 billion dollars, indicates the exchange operator, TMX Group.
The overall financial value of Canadian companies is reported to a point system to facilitate analysis, explains Gabriel Asselin.
The number of points thus reflects the market capitalization of the Canadian equity market.
Therefore, the index accumulates points when the value of market shares has increased.
When the index was launched, a value of 1,000 points was given to the sum of the market capitalizations of the Canadian market, specifies Gabriel Asselin. The Canadian equity market has lost and gained points over time depending on supply and demand: today the index reached over 20,000 points.
People should instead look at the S&P/TSX Composite Index as a percentage, as it allows for a better interpretation of the state of the Canadian stock market, he points out. We always mention the points simply because the system historically started that way, says Gabriel Asselin.
“It’s all about the ratio. Absolute value is worth what it’s worth. The percentage is much more interesting,” he adds.
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