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What Every Newbie Investor Needs To Know About The SGX & STI

If you don’t already know, it is time to find out.

 

If you stayed long enough in Singapore, you would have heard of these two common investing acronyms, SGX and STI.

Those who are familiar with the topic of investing would immediately know what these two terms are. For others who are not as savvy in the investing space, we will explain to you what these two terms mean and their differences.

Singapore Exchange (SGX)

SGX is the short form for the Singapore Exchange, a stock market of Singapore. It is the place where stocks are traded between investors.

As Singapore position itself as one of the leading capital markets of the world, thus the SGX plays an important role. The SGX is where businesses can choose to get their companies listed, and gain access to funds from the public. In return, listed companies give out some ownership in their companies in the form of stocks. This process is also known as the initial public offering (IPO).

As of today, there are more than 500 companies being listed on the SGX mainboard. There are also companies that are listed on SGX’s catalist, which can be seen as a junior exchange board for companies that are smaller in size.

Market Index – The Method To Track The Performance Of The Stock Exchange

Since the SGX consists of hundreds of different companies across multiple industries, it would be difficult at any point in time to track just how well the exchange is performing.

To solve this problem, all exchange would usually have at least one market index. What this market index(s) does is that it takes the aggregate value produced by several key stocks within the exchange, and expresses their value against a base value to create the market index that has a value to it. This market index is meant to be a proxy (i.e. representative) for the entire stock market.

In other words, analysts, fund managers and the investment community will typically take the performance of the market index and treat its performance as a representation of how the entire stock exchange is doing.

The Straits Times Index (STI), The Proxy For SGX

The Straits Times Index, which people simply call the STI, is the market index for the SGX. People treat the value of the STI as a gauge to how well (or how badly) the stock market is doing in Singapore.

The STI consists of the 30 top companies listed on the Singapore Exchange. There are a few criteria that are required for companies to meet before they qualify for the STI such as trading volume. Generally speaking, we are looking at the top 30 biggest companies on the exchange.

Even though it only includes the 30 biggest companies in the SGX, these companies represent about 60% of the total market size in the SGX. Hence, they would be a good proxy to how the entire stock exchange is performing.

However, it is important to also understand the limitations of the STI. The most obvious being that only 30 companies make up the STI, while there are more than 500 companies listed on the SGX.

The STI is also a weighted index. What that essentially means is that the performance of the biggest companies listed on the STI (e.g. SingTel, DBS, OCBC, Jardin, UOB) would affect the STI value much more than the smaller companies on the STI (e.g. Noble, Sembcorp Marine, SIA Engineering, Olam, Hutchison Port). This makes sense, but also means that the STI is biased for certain industries.

Notice that the 3 local banks are all part of the biggest companies on the STI? What this means is that if the financial markets take a tumble, these banks would be affected and in turn, they will affect the STI significantly and cause it to fall.

Even while the STI is meant to be a representation of the entire stock exchange, we cannot get away from the fact that because of the way it is constructed, it leans a little more toward sectors such as banking and property.

In summary, we would say that despite its limitations, the STI is probably the best representative of how the stock market is faring in Singapore. Investors can also invest directly into the STI, instead of buying individual stocks listed on the STI, through the use of exchange-traded funds (ETFs) offered on SGX.

Read Also: Why The Average Singaporean Should Buy The STI ETF As Their First Stock

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