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The Companion Advisor: Techniques & Methods
Market benchmarks

A Companion Advisor Article

As we hear about the daily levels of the TSE 300, Dow Jones Industrial Average, and other market benchmarks, it's helpful to understand how those numbers are derived.

The Toronto Stock Exchange 300 Composite Index (TSE 300) measures changes in the market value of 300 stocks. For each stock, the daily price is weighted by the total number of shares outstanding so large-capitalization companies have a stronger effect on the Index than small-caps. In addition, there are 14 major group indices such as Metals and Minerals, Oil and Gas, Consumer Products, etc. The base year for the TSE 300 is 1975 when the base value was set to equal 1,000. So, if the TSE 300 is at 4500 today, this is 4.5 times the value it was in 1975.

The Montreal Exchange Canadian Market Portfolio Index (ME) is comprised of 25 widely-held, highly-capitalized stocks listed on the Montreal Exchange as well as at least one other Canadian exchange. It is not weighted, so all 25 stocks have the same effect on the Index. Its base value of 1,000 was set in 1983.

The Vancouver Stock Exchange Composite Index (VSE) is based on over 1,400 VSE-listed companies that trade at least 50% of their market volume in Vancouver. It was weighted like the TSE 300 beginning in 1986, and its base value of 1,000 was set in 1982.

The Dow Jones Industrial Average tracks 30 large-capitalization stocks that trade on the New York Stock Exchange. It is not an index but an average. The calculation is done by adding the prices of each of the 30 issues in the index and dividing by a number periodically adjusted for stock splits. Because it is an average, a stock that sells for a higher price has a greater effect than a lower-priced stock. It is criticized because few companies are included, not all new industries are represented, and its method of calculation is weighted by price. Nevertheless, it is the index which receives most of the attention.

The ScotiaMcLeod Universe Bond Index is based on whatever AA, A, and BBB bonds are issued on any particular day. It is comprised of approximately 60% Government of Canada issues, 25% Provincials, 1% Municipals, and 10% Corporates. It's base value of 100 was set in 1985.

The Daiwa Bond Index (DBI) is a daily bond index which covers all categories of Japanese publicly-issued coupon bonds. It is calculated and released by Daiwa Institute of Research, based on a world-standard calculation method. DBI consists of a total return index, which is the accumulated number of total returns with the base date set at 100, and various auxiliary indices to enable a detailed analysis of the market. DBI was first released in June 1986. In April 1989, due to a change in the market environment, the index was modified.

NASDAQ (National Association of Securities Dealers Automated Quotations) tracks the performance of small- capitalized stocks. In the financial markets, a company's size is most often defined by its market capitalization ("cap"), which is found by multiplying its stock price by the number of shares outstanding. "Small" usually refers to market caps below $500 million, but there is no hard and fast definition. Most small-company stocks trade in the over-the-counter (OTC) market, a network of broker/dealers linked by telephones and computers. Prices of most OTC stocks are furnished by NASDAQ and made available to the media.

Market benchmarks are designed to give a general snapshot of market performance. Your investments may differ, and it's always wise to consult your investment advisor before making any investment decisions.