Stock Exchange Index is a measure of relative changes in prices of stocks from one period to another index. Nairobi Stock Exchange 20 – share Index (20 companies) (Daily basis) Stanchart Index – From 25 most active companies in a given period (weekly basis) Computation of price index.
Uses of Stock Exchange Index
1. To gauge price (wealth movement in the stock market)
2. To assess overall returns in the market portfolio
3. To assess performance of specific portfolio using SEI as a benchmark.
4. May be used to predict future stock prices
5. Assist in examining and identifying the factors that underlie the price movements.
Limitations/Drawback of NSE index
1. The 20 companies sample whose share prices are used to compute the index are not true representatives.
2. The base year of 1996 is too far in the past
3. New companies are not included in the index yet other firms have been suspended/deregistered e.g. ATH, KFB etc.
4. Dormant firms – Some of the 20 firms used are dormant or have very small price changes.
5. Thinness of the market – small changes in the active shares tend to be significantly magnified in the index
6. The weights used and the method of computation of index may not give a truly representative index.