The Construction and Maintenance of the FTSE/JSE Top40 Index

The JSE|FTSE Top40 Index consists of the 40 largest, ranked by market capitalization on the, JSE stock exchange (FTSE Russell Factsheet). Market capitalization is defined as the market value of a company’s outstanding shares and is therefore calculated by multiplying the current market price of one share by the total outstanding shares for that company (Investopedia). Market capitalization is an effective way to rank companies as it is an effective risk measurement of a company. If companies have a large market capitalization they are usually well-established that deliver consistent dividends to their shareholders.

The Top40 Index represents over 80% of the total market capitalization of all JSE listed companies and is therefore a fair reflection of the South African stock market as a whole. It is comprised from its universe – the All Share Index, which represents 99% of the full market capitalization of all equities listed on the JSE Main Board. The number of constituent companies in the Top40 Index can exceed 40 if a company has listed multiple equity instruments (JSE Headline).

The weighting methodology of each company’s market capitalization within the Top40 Index is free float. The free float method excludes locked-in shares from the calculation as they are held by “insiders, promoters and governments” (Investopedia) and therefore are not actively available for trading in the market. This method differs from the full market capitalization method whereby the locked-in shares are included in the calculation. The free-float method is a more accurate representation of the size of each company in the market and the “market movements” due to available stocks (Investopedia).

The index is reviewed quarterly: March, June, September and December. The index aims to maintain stability regarding its constituents and therefore, at quarterly review, a company will only be inserted into the Top40 Index if it has risen to 35^th place or above and will only be deleted from the index if it has fallen to 46^th place or below. A constituent’s weighting will also only be altered in the index if the total shares in issue changes more than 10% on a cumulative basis. This is to avoid many, insignificant weightings changes (JSE Ground Rules).

Resources used:

FTSE Russell Factsheet

JSE Headline

JSE Ground Rules