On 8 Feb 1971, an automated quotation system called Nasdaq
(National Association of Securities Dealers Automated Quotations) provided up-to-date bid and ask prices on 2,400 leading over-the-counter (OTC) stocks. Prior to Nasdaq, quotations for these unlisted stocks were submitted by the principal trader or by brokerage houses that carried an inventory. Now Nasdaq linked the terminals of more than 500 market makers nationwide to a centralized computer system. The Nasdaq Index is owned and operated by The Nasdaq Stock Market, which list mainly the technology stocks.The Nasdaq Index, which is a value-weighted index of all stocks traded on the Nasdaq, was set at 100 on the first day of trading in 1971. It took almost 10 years to double to 200 and another 10 years to reach 500 in 1991. It hit a milestone of 1,000 in Jul 1995. As the interest in technology stocks grew, the rise in the Nasdaq Index accelerated, and it doubled its value to 2,000 in just 3 years. In the fall of 1999, the technology and Internet boom sent the Nasdaq Index into a frenzy, peaking at 5,048.62 on 10 Mar 2000.
Straits Times Index (STI)
Lastly, we come to Singapore’s Straits Times Index (STI), a value-weighted index. It was previously known as the Straits Times Industrial Index (STII). On 31 Aug 1998, the STII was renamed and ended at 885.26 points in the midst of Asia Financial Crisis. The STI is a value-weighted index constructed by the SPH, in conjunction with the SGX and a few other professionals.
Currently, there are 48 STI component stocks. In early Oct 2007, SGX announced that they are will revamp the component stocks again. Twenty-two current component stocks will be removed and four new stocks will be added in. To be eligible for entry to the new indices, a stock must have a free float - the proportion of shares available for trading by investors - of more than 15% and it must also pass a liquidity test.
Finally, have you ever think carefully what actually drives the index? If your answer is the investors, yes but what will affect these investors decision (whether they are speculators or value investors)? If you answer is corporate performance and/or market sentiment, yes but what will affect directly corporate performance and/or sentiments?
The Economy
Yes, the stock market performance, measured by various indexes is ultimately affected by the economic performance of a country or major developed countries. As such, we know that stock market is an indicator of future economic performance. When analysts, speculators and investors believe that an economic downturn is approaching, they will take one of the two actions – run or short. Either way, the stock market will clash. Therefore, as a value investor, we should study corporate performance and most importantly, the general economic performance.
“But I thought that as a true value investor, we should focus on a company long-term prospect and Warren Buffet does not dispose his stocks away during market downturn!”
Some of my friend had made such remarks to me before. If that is also your views, you are not wrong and I understand what you mean. But there is a different between Warren Buffett and a retail investor in investment management. But this is outside the scope of this article. I’ll talk about it in another article.
