What is a stock market index?

A stock market index is a measure of the average price level of the shares traded in the market.  Its use is analogous to the use of degree of celcius to measure the temperature.  It is constructed by comparing the current price of a sample of shares with their prices at some earlier date. 

The organization which is setting up the index (e.g. KLSE) has to make two decisions regarding the design of the index. 

First, what are the companies to be included in the index?

Second, what is to be the starting point of the index?

Both decisions would involve a certain degree of compromise.

In general, 30 companies is a good compromise to represent the actual situation at the stock market.  KLSE Indices have the starting date of 1st January 1970.  The KLSE Indices are given the base value of 100 as at 1st January 1970. 

There are various ways of computing an index but the easiest way to understand is probably the one using the market value of the companies included in the index. 

The KLSE Industrial Index has a based value of 100 at 1st of January 1970.  It stood at 700 at the end of August 1988.  This means that the market value of the companies chosen for the index had increased their total value by 600 per cent since 1970 (an average annual increase of 11.5 per cent). 

It is worthwhile to remember how indices are calculated and remind ourselves how much the market has gone up in the bull run.  When the market is next in a manic phase, we have to ask ourselves if it is feasible for the market to continue its performance in the future.

Click:
http://finance.yahoo.com/echarts?s=%5EKLSE#symbol=%5EKLSE;range=my
FTSE Bursa Malaysia KLCI Index (^KLSE)

http://blog.limkitsiang.com/2007/03/06/rm149-billion-klse-losses-in-5-days-pmministers-not-stock-market-consultants/
RM149 billion KLSE losses in 5 days