PSEi breaches 5,000-point mark
Last week, the Philippine Stock Exchange index breached the 5,000-point mark.
But first let me explain what that statement means. What is an index and what does breaching the 5,000-point mark mean?
If we make an analogy between the stock exchange and school marks, the index would be your average. Generally, a stock exchange index is a weighted average. In some schools, average grade are also weighted, depending on the thrust of the school. For example, a science high school may give more weight to science and mathematics than to literature. In universities, a lecture class may have more units than a laboratory class. This is the same in the stock exchange, some stocks have more weight than others, and this is true in the case of the Philippine Stock Exchange Composite index or PSEi.
The PSEi, formerly known as the Phisix, is composed of a basket of 30 stocks, representing different business sectors or entreprise categories. Each of the thirty stocks has an equivalent weight to the index. The criteria for the weight is determined by the board of the Philippine Stock Exchange. I can’t remember if it’s the stock price of each component stock or if it’s the market capitalisation (which is a function of the stock price) that is multiplied by the weight then added together to form the index. The index is measured by points precisely because it’s not an absolute monetary value but a relative value. So when you say that the PSEi breached the 5,000-point mark, it means that the stock price of these component companies, relative to their weight to the basket, altogether went beyond the 5,000-point level.
In the stock market, as with school marking, this milestones are often regarded as psychological barriers. For many of us who go to school that grades us in as scale of 0-100, an 86 is as good as an 89, but a 90 is a whole lot better that 89, even if it’s just one point more than 90. That psychological barrier between 89 and 90 is the same psychological barrier that retail companies use when selling you clothes that are “Under 200”, i.e. 199.99. It’s just 0.01 away from 200 but you still think it’s a lot cheaper, until you reach the cash register. In the PSE, 100-point levels are know to be psychological levels, and you can see stock market watchers saying that market players are testing the levels when within the day, the index goes up to the next 100-point mark and then go down, meaning, players don’t think that the market can sustain the gains and will start selling stocks once they believe that the highest index price has been reached. You will also read about the market riding on a momentum, when players keep on buying despite the market going past psychological levels.
Within the last year, the market has gone from a low of 3,000 points to as much as 5,000 points. Is that a good thing? Yes! Since the PSEi was created, the index has gone to a low of 900 or so points, while barely moving in other years. A 2,000-point increase in one year is remarkable.
I have read in another post how indices are used in investing in the stock market. I say it’s time to invest in the stock market. In my next post, I will talk about how you can take part in this winning streak without losing your hair in the process.