What it means
A stock index is a single number that summarises how a group of shares is performing. KOSPI covers the companies on the main board of the Korea Exchange, and it was set to a value of 100 on 4 January 1980.
Readings are measured against that starting point, so a level of 2,500 means the market is worth about 25 times its base value. The index is capitalisation weighted, meaning that larger companies have a bigger influence on the number than smaller ones.
Market capitalisation is the share price multiplied by the number of shares in issue. As a result, a handful of very large firms can move the index by a noticeable amount.
KOSPI is widely used as a gauge of the health of the Korean economy and as a benchmark for funds. Investors compare the returns of their portfolios with the index to judge how well they are doing.
Index funds and exchange-traded funds are built to follow it, giving investors a simple way to hold the market as a whole. The index is calculated by comparing the total market value of the listed shares today with the total on the base date, and multiplying by 100.
Adjustments are made when companies list, delist or change their share numbers, so that the value reflects market movements and not administrative changes. This is the standard method for most major indices.
Because the index is dominated by large exporters, particularly in technology and manufacturing, it responds to global demand, trade conditions and the exchange rate of the won. Foreign investors therefore watch it as a signal about world trade.
Currency movements can also add to or take away from the return in their own currency. When quoting the index in a report, give the date and the source, since the level changes constantly.
Avoid treating a past level as a current one. For comparison between years, think in terms of percentage changes and not just raw points.
In practice
Real-world examples.
Example
A pension fund in Europe holds an exchange-traded fund that tracks KOSPI. The fund manager reports that the index rose 8% over the quarter in won terms. Because the won weakened by 3% against her home currency, the return in her own currency was lower.
Example
A Korean asset manager runs an equity fund and measures its results against KOSPI. If the fund returns 12% when the index returns 9%, it has outperformed by 3 percentage points. The manager uses this in her client report.
Example
A multinational company with a large Korean subsidiary monitors KOSPI as a sign of local business confidence. A steady fall over several months prompts the finance team to review the subsidiary's sales forecasts. They also test the effect of a weaker won on profit.
Formula
Calculation
KOSPI = (current total market capitalisation / base total market capitalisation) x 100.
Suppose, in a simplified example, the base market capitalisation is $10,000,000,000 and today's total is $25,000,000,000. The index level is (25,000,000,000 / 10,000,000,000) x 100 = 2.5 x 100 = 250. If the total then rises to $26,250,000,000, the index becomes (26,250,000,000 / 10,000,000,000) x 100 = 262.5. The percentage change is (262.5 - 250) / 250 = 0.05, which is a 5% rise.Case study
Seen in the real world.
Seoul Bridge Partners is an illustrative, fictional fund that invested $20,000,000 in an index-tracking product following KOSPI. At the start of the year the index stood at 2,400, and at the end it stood at 2,640.
The change was (2,640 - 2,400) / 2,400 = 10%, so the investment grew to about $22,000,000 before fees and currency effects. During the same period the won fell 4% against the fund's base currency, which reduced the return to roughly 5.6%.
The illustrative lesson was that the index number only tells part of the story. The fund's committee now reports local-currency and base-currency returns together, so that clients can see what came from the market and what came from the exchange rate.
Watch out
Common mistakes.
- Assuming KOSPI measures all Korean stocks, when it covers the main board and a separate index tracks the smaller growth market.
- Ignoring currency, when a foreign investor's return depends on both the index and the won.
- Comparing index points between different indices, when each has its own base date and method, so only percentage changes are comparable.
Questions
People also ask.
What does KOSPI stand for?
It stands for the Korea Composite Stock Price Index, the benchmark for the South Korean main stock market.
How is KOSPI weighted?
It is weighted by market capitalisation, so larger companies have more influence on the index than smaller ones.
What was the starting value?
The index was set at 100 on 4 January 1980, and all later levels are measured relative to that base.
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