The Johannesburg Stock Exchange (officially known as JSE Limited) is the largest stock exchange currently operating in Africa. It features hundreds of listed companies and has a market capitalisation of more than $1.3tn as of 2022.

Like other major stock exchanges, the JSE has entered our everyday news cycle. We often hear about the market being up or down, but have you ever wondered what that means? After all, the JSE features hundreds of listed companies, some of which will go up and some down. The answer lies in the concept of the ‘index’ and the many indices connected to the JSE.

In this article, we will take a closer look at how the JSE works and how these indices operate. Whether you are planning to invest in JSE Top 40 companies or simply want to know more about the subject, read on for a fuller understanding of the JSE index.

All about indices

An index is essentially a guide or benchmark to the way that a market is performing. If you wanted to track how well the JSE was performing, you could add up all of the prices of all of the stocks in that market. This is too difficult, however, so instead, a smaller sample of stocks is taken, and treated as representative of the whole market.

This is essentially the same method that opinion poll compilers use to measure what a population is thinking. It would not be practical to interview every person in the country, so a sample of 1,000 or so people is interviewed, and the results adjusted and weighted to ensure the sample is fully representative of the population being studied.

The result of this process is the production of an index that represents an overall fall or rise in the value of the shares in that market. Although there will be some discrepancies, if the index is correctly calculated, it will do a good job of representing the overall state of the market.

How is the index calculated?

The key to the index calculation is a method known as market cap weighting. This means that every stock that is included in the index is weighted according to how many shares in that stock have been issued overall. These calculations are carried out by computers and updated every minute as the prices change, so the index is extremely accurately correlated to the market.

A choice of indices

The JSE is a major international exchange and like other similar exchanges, it has more than one index. These are the most significant indices at the JSE:

All Share Index

This is the main index of the share market, and it is made up of companies that account for around 99% of the companies listed on the main JSE board. This is the biggest index available at the JSE, both in terms of value and size, but it is not the most significant.

ALSI 40 Index

Also known as the All Share 40 Top Companies Index, this is the most important of the indices run by the JSE, as it is the one that most people use to assess the overall performance of the exchange.

This index is based around the 40 largest companies traded on the JSE. These are usually large companies with heavily traded shares, including the likes of Shoprite, Sasol and MTN. This is a relatively small percentage of the stocks listed on the exchange, but the theory is that movements in the share price of these major companies can be taken as indicative of the whole market.

Other indices

There are several other indices available with the JSE, which have a lower profile than the ALSI 40 and the All Share Index, but which are still considered important:

• Mid Cap Index – representing 85% to 96% of the market cap value of stocks on the JSE.
• Financial Index – exclusively focused on bank stocks.
• Resource Index – covering resource stocks.
• Industrial Index – including stocks from companies in the industrial sector.

Summary

The JSE is one of the world’s most significant stock exchanges and represents the largest concentration of stocks in Africa. As such, its indices, in particular the ALSI 40 Index, are some of the most important financial indicators on the continent. A full understanding of the way in which the indices are compiled and of what they represent is a key step for investors who are thinking of getting involved in the South African stock market.