Indices are basically indexes which are used by the stock market where they are calculated based on the several different stocks and players of the specific market. In Malaysia, the stock market index is managed and reported through Bursa Malaysia. The word indices is used to portray more than one index where naturally, they are the benchmarks of the performance of the portfolios.
There are certain investment funds which are managed to provide analysts and investors with the performance mirror of the stock market index and in some cases a certain sector in them. For instance, the CPI or Consumer Price Index is reported to tell you how have retail prices for consumer products changed for a certain period.
As investors, an index is a necessary tool which you can use to measure the performance of a group of stocks from a specific market and in most cases, the main stock market under Bursa. Stocks which are used to form the index are also a prestigious status which could gain much confidence from its investors and shareholders. There are a few classes of indices in a stock market where you would come across a broad-based index which will basically represent the stock market as a whole which is usually used by investors on their sentiments of the current economy. Bursa Malaysia uses the FBM-KLCI which is made up of stocks of large companies listed on its Main Markets. The other common indices from other countries include the Japanese Nikkei 225, the America Dow Jones Industrial Average and the British FTSE 100.
Generally, the FBM-KLCI has been developed over the past 2 decades where it is now more than merely an indicator of the Malaysian economy. It has since been enhanced to have more technical functions where it is now calculated using the market capitalisation weighted method where the total value of the listed companies’ shares based on the market prices are used.
The FBM- KLCI stands for FTSE Bursa Malaysia Kuala Lumpur Composite Index and it is considered as an international and standardised way of portraying the market on a daily basis. The FTSE is the index partner of Bursa Malaysia where the index have adopted an international calculation methodology which will be able to portray the true value of the
economy to investors and shareholders.
The FBM-KLCI is basically the market barometer where it is made up of the primary market movers and are specifically selected and evaluated to represent the stock market of Malaysia. It is calculated based on the method where free float and liquidity screen are emphasized so that the market can be clearly represented and portrayed. 30 stocks are used to calculate the constantly varying FBM-KLCI and this is such in order for the index to be managed easier.
The frequency of calculating the index have been changed recently from 60 seconds to 15 seconds and this is done so to provide a refreshed outlook of the market in a shorter interval and the historical movements of the stock market of Malaysia can be preserved through the continuity of the value of the FBM-KLCI index.
As mentioned, the FBM-KLCI is derived from the 30 largest companies listed on the Main Board of Bursa Malaysia where their full market capitalisation are used and they must fully meet the Ground Rules stipulated by the FTSE Bursa Malaysia which will involve free float and liquidity elements.
For Free Float, each of the companies selected must have a 15% minimum of shares on the free float basis that must not include restricted shareholding that covers the likes of any significant long term holdings owned by the founders, their families or directors, cross holdings, restricted share schemes for the employees as well as any portfolio investments subjected to a lock in clause or any government holdings. Factors in the free float element must adhere to the banding as specific in the Ground Rules of FTSE Bursa Malaysia of the market capitalisation of each of the 30 companies selected.
Meanwhile, the liquidity element here is evaluated where the stocks of the particular company must be liquid enough in order to be traded where it is calculated based on the median daily trading of each month of the particular company.
History of KLCI
The market barometer was first introduced and launched in 1970 where it was already started off with using 30 industrial stocks. In 1985, after much study and discussions, the industrial index was deemed to be no longer reflective of the stock market performance and it was then agreed by all parties involved that the stock market would need to have a more suitable index which would clearly and more accurately reflect the performance of the market and was more sensitive to the expectations of investors. On top of that, the index would also need to be more responsive to any changes to the economy and have better indication of the policy changes implemented by the government.
This gave rise to the birth of the KLCI or Kuala Lumpur Composite Index in 1986 where it involved 83 major companies where the index was calculated thrice on each trading day with trading volume criteria of 250 lots per year. The three-time daily calculation was then revamped in 1990 where it was then changed to every 15 minutes. In 1992, the trading volume per annum was changed to 1,000 lots and in 1995 the interval was changed to 60 seconds while the numbers of constituents or companies involved was added and fixed to 100. This was done to accommodate the listing of stock index futures in the market and enhancements to the objectives were made in 1998 which were targeted to better track the economy. In 2005, the practice of adjusting the index base for dividends was no longer used.
Bursa Malaysia underwent a major restructuring process in 2009 when its name and the boards were changed and it was this year where the FTSE Bursa Malaysia Index calculation methodology was adopted and KLCI becomes FTSE Bursa Malaysia KLCI (FBM-KLCI) to ensure that they are more reflective, effective and more relevant. In June 2011, the liquidity screening rule was changed and enhanced where it was to further align the index to be more globally accepted.
How is the FBM-KLCI calculated?
The FTSE will adopt real time and closing prices of the stocks from the Main Market of Bursa Malaysia in calculating the FBM-KLCI. This is done through calculating the value weighted formula and the using the free float factor adjusted accordingly. Every 6 months, the FTSE Bursa Malaysia Index Advisory Committee will review the FBM-KLCI and this is carried out in June and December. The committee will use the last trading day of May for the June review while for the December review, the last trading day of November is then used. Any changes that come out from the review will then be implemented when the market on the 3rd Friday of the 2 review months (June and December) are completed. As mentioned before, the FBM-KLCI is calculated, refreshed and announced every 15 seconds throughout the market day on a real time basis. By adopting a shorter interval, which replaced the previous 60 seconds duration, the FBM-KLCI is more dynamic and is known to offer a clearer representation of the current trading economy.