Investing
Breaking down the JSE all-share index
What is the JSE?
To understand what the JSE all-share index is, we need to start with what the JSE is. The Johannesburg Stock Exchange (JSE) is a company. This company allows companies to list their shares and for investors to buy these shares. So, the JSE and all other stock markets for that matter, essentially run a massive excel sheet that specifies what shares belongs to which investors.
Each company that lists with the JSE is broken down into literally millions of smaller parts that can be sold individually to investors. The JSE keeps track of each share, its worth and to which investor it belongs. For regulating these transactions, they charge a small fee every time a share changes hands and that is how they make money. In case you were wondering, the JSE is also listed on the JSE stock exchange.
The most important function of the JSE is regulating the companies listed with them. This makes investing on the JSE safe for investors. If you want some bedtime reading material that will put you right to sleep, you can find the 474-page listing requirements here. Some of these requirements are:
- Having regular shareholders meetings
- Publish interim, yearly and audited financial statements
- Publishing a Stock Exchange News Service (SENS) announcement for various things, like when earnings will vary by more than 20%
All of these regulations are designed to protect the investor. This is also the reason why it is advisable to always invest in listed products. Over the counter options are not regulated and the biggest problem is that selling the assets is extremely difficult since there is no market consensus on the price.
How many companies are listed on the JSE?
At this stage, there are 346 companies listed on the JSE, of which 20 are suspended since they do not adhere to the JSE listing requirements. The JSE is broken down further into the larger companies, known as the JSE top 40, the mid-cap companies and the small-cap companies.
The top 40 companies are the biggest 40 companies on the JSE by market capitalisation. These are also referred to as the blue-chip companies. Since companies vary in size constantly, the top 40 also changes regularly. The midcap companies comprise the companies that are 41st to 100th in size while the small-cap companies are all the other companies listed on the JSE.
What is the JSE all-share index?
One would think that the JSE all-share index (sometimes referred to as the ALSI) would comprise all the shares on the JSE. However, it only includes 164 companies, which is about half of the companies on the JSE. These are the biggest 164 companies on the JSE, so together they make up about 99% of the JSE. This means that the price movement of the JSE all-share index would be almost identical to the movement of all the companies.
Inside this index, there are companies from various sectors, including banking, mining, construction, insurance, energy, food and various other sectors. It also includes some Real-Estate Investment Trusts (REITs) and even Exchange-Traded Funds (ETFs). So when you buy the Satrix MSCI World, the Coreshares SA Property or the ABSA Newfunds GOVI (bonds), you are buying JSE listed investments. These still adhere to the JSE listing requirements.
JSE all-share index performance
Over the years, the performance of the JSE all-share index has been exceptional. The last 20 years, has returned 631%, or a compound annual growth of about 10.5%. This excludes the dividends that are more than 2%. So, let’s call it roughly 13%. When I do extrapolations, I usually use a growth rate of 12%, which is conservative or enthusiastic depending on who you ask. Over the last 12 months, the return has been 9.25%, excluding dividends.
Trading on the JSE
To trade on the JSE you need to have an account at one of the registered stockbrokers. These brokers can write transactions to the JSE and read prices from the JSE, who then keeps track of everything. This allows you to place orders for shares, ETFs, etc. Some of the larger stockbrokers include the big four banks, Satrix, Sygnia and Easy Equities. When choosing a stockbroker, always check the platform fees, trading fees and securities that can be traded on each platform.
Usually, you can only buy the top 40 index but there are a few companies like Satrix that offer an ALSI product. The mid-cap and small-cap shares tend to be more volatile, so most investors stick to the top 40. Yes, the possibility for growth might be less but there is a reason why these companies are on top.
Article reposted with permission from the Tigers on a Golden Leash blog. Original post here.
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