Demystifying the Economy | The S&P/TSX Composite Index: The value of points

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Posted at 7:00 am

Delphine Belzile

Delphine Belzile
The press

When we say the S&P/TSX lost a point, what does that mean? What does the value of a point represent?

Minh VanTran

Introduced in 1977, the S&P/TSX Composite Index represents the performance of Canadian companies in the local stock market. This is the main indicator of the Toronto Stock Exchange. We refer to it to follow the stock market activity of the Canadian stock market.

“We tend to confuse the stock market and the economy: they are two different things that don’t always go in the same direction,” says Gabriel Asselin, financial advisor at Medici Strategic Portfolio Management.

The S&P/TSX Composite Index tells us whether the stock price of Canadian companies has risen or fallen, the specialist explains. It’s a “snapshot” of the state of the stock market at a given point in time that’s constantly updated, he notes.

If the index is up 1%, that means Canadian company shares are up 1% on average, stresses Gabriel Asselin.

The S&P/TSX Composite Index is a bit like a school report card. It represents the class average.

Gabriel Asselin, Financial Advisor at Medici Strategic Portfolio Management

It includes 238 Canadian companies, including banks and energy companies, covering 95% of the country’s stock market. The largest components include the Royal Bank of Canada and Enbridge. The United States has a similar index, the S&P 500, which in turn covers 80% of the American stock market.

The points system

The parameters must be met by Canadian companies to appear among the constituents of the Toronto Stock Exchange’s main index: in particular, they must have a share turnover rate of at least 0.5 and represent no less than 0.04% of the index’s total market capitalization weight.

The S&P/TSX is re-rated every three months. Companies can be removed from the index if they do not meet the required criteria.

To date, the value of all components of the S&P/TSX is $3,245.7 billion, according to exchange operator TMX Group.

The aggregate financial value of Canadian companies is reported using a points system to facilitate analysis, explains Gabriel Asselin.

The score thus reflects the market capitalization of the Canadian stock market.

Therefore, the index accumulates points when the value of market shares has increased.

When the index was introduced, the sum of the market capitalizations of the Canadian market was valued at 1,000 points, Gabriel Asselin specifies. The Canadian stock market has lost and gained points over time based on supply and demand: today the index hit over 20,000 points.

People should look at the S&P/TSX Composite Index as a percentage instead, as it gives a better interpretation of the state of the Canadian stock market, he points out. We only ever mention the points because historically that’s how the system started, says Gabriel Asselin.

“It depends on the relationship. Absolute value is worth what it is worth. The percentage is much more interesting,” he adds.

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