Clearing and settlement
Equity clearing is usually defined as the matching of trades and the "netting out" of trades. This is given effect by the clearing system. "Netting out" means that the clearing system nets out the trades of each broker-dealer, and the broker-dealer has to deliver scrip / receive scrip on a net basis. With many transactions taking place daily, it is impractical for each trade to be cleared and settled individually.
Settlement means the exchange / delivery of equity scrip and the payment therefore. Part of clearing and settlement is to transfer ownership from seller to buyer.
Cost of dealing
The costs of dealing (called transaction costs) differ from country to country and may include the following:
• Brokerage (usually fully negotiated). An example is 0.25%. This amount is levied on the consideration, before the other costs are taken into consideration. If the amount of shares is 10 000 and the price dealt at is 745 cents, the consideration is LCC74 500.00. The brokerage on this consideration is LCC186.25 (LCC74 500.00 x 0.0025).
• CSD settlement costs. The CSD levy is usually a flat amount per deal (e.g. LCC6.00).
• Insider trading levy. An example from one country is 0.00071% of the consideration. In the above example, the amount payable is LCC0.53 (LCC74 500.00 x 0.0000071).
• Value Added Tax. This applies in many countries. For example if VAT = 14% is payable on the above costs the amount is LCC26.99 (0.14 x (LCC186.25 + LCC6.00 + LCC0.53))
• Marketable Securities Tax. MST is usually only payable on purchase transactions and it is levied on the consideration. For example, at MST of 0.25%, in the above example the MST payable is LCC186.25 (LCC74 500 x 0.0025).
All these costs are shown on the broker's note. In the above example, the total transactions costs are LCC406.02, which is equal to 0.54% of the consideration.
Equity market indices
Introduction
Individual share prices rise, fall, and rise and fall at different rates, all at different times. If an equity market has many hundred listed shares, how do investors know what is happening in the entire market and/or to different segments of the market, such as the transport sector shares or the gold mining sector shares?
The answer is equity indices. Every equity market participant in the world has heard about the Dow Jones Industrial Average (DJIA) index. This is an index (i.e. a number) that demonstrates the performance of the 30 largest industrial companies listed on the New York Stock Exchange (NYSE). The DJIA is the first known equity index: it was started in May 1896 when Mr Dow summated the share prices of the 12 largest industrial companies and divided the numbers by the number of shares. Another eight shares were added to the index in 1916 and a further 10 in 1928.
Other well known foreign indices are the S&P 500 index, the NASDAQ composite, the NYSE composite, the FTSE 100, the DAX indices, the CAC indices, etc.
Share indices essentially provide an image of the performance of the equity market. An index may also be described as a tool that "describes" the share market at a point in time in terms of price levels, dividend yield and earnings yield. Portfolio trackers also use indices as benchmarks against which their portfolio performance is measured.
FTSE / Dow industry classification benchmark
Most share exchanges have accepted / adopted the industry classification system (called the industry classification benchmark - ICB) created in 2004 by index companies FTSE and Dow Jones. In terms of the ICB there are:
• 10 industries
• 18 supersectors
• 39 sectors
• 104 subsectors.
Table 1 shows all the industries, supersectors, sectors and subsectors of the ICB classification system.
|
Industry |
Supersector |
Sector |
Subsector |
|
Oil & gas |
Oil & gas |
Oil & gas producers |
Exploration & production |
|
Integrated oil & gas |
|||
|
Oil equipment & services |
Oil equipment & services |
||
|
Pipelines |
|||
|
Basic materials |
Chemicals |
Chemicals |
Commodity chemicals |
|
Specialty chemicals |
|||
|
Basic resources |
Forestry & paper |
Forestry |
|
|
Paper |
|||
|
Industrial Metals |
Aluminium |
||
|
Nonferrous metals |
|||
|
Steel |
|||
|
Mining |
Coal |
||
|
Diamonds & gemstones |
|||
|
General mining |
|||
|
Gold mining |
|||
|
Platinum & precious metals |
|||
|
Industrials |
Construction & materials |
Construction & materials |
Building materials & fixtures |
|
Heavy construction |
|||
|
Industrial goods & services |
Aerospace & Defence |
Aerospace |
|
|
Defence |
|||
|
General industrials |
Containers & packaging |
||
|
Diversified industrials |
|||
|
Electronic & electrical equipment |
Electrical Components & Equipment |
||
|
Electronic Equipment |
|||
|
Industrial engineering |
Commercial vehicles & trucks |
||
|
Industrial machinery |
|||
|
Industrial transportation |
Delivery Services |
||
|
Marine Transportation |
|||
|
Railroads |
|||
|
Transportation Services |
|||
|
Trucking |
|||
|
Support services |
Business support services |
||
|
Business training & employment agencies |
|||
|
Financial administration |
|||
|
Industrial suppliers |
|||
|
Waste & disposal services |
|||
|
Consumer goods |
Automobiles & parts |
Automobiles & parts |
Automobiles |
|
Auto Parts |
|||
|
Tyres |
|||
|
Food & beverage |
Beverages |
Brewers |
|
|
Distillers & Vintners |
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|
Soft Drinks |
|||
|
Food producers |
Farming & fishing |
||
|
Food products |
|||
|
Personal & household goods |
Household goods |
Durable household products |
|
|
Nondurable household products |
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|
Furnishings |
|||
|
Home construction |
|||
|
Leisure goods |
Consumer electronics |
||
|
Recreational products |
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|
Toys |
|||
|
Personal goods |
Clothing & accessories |
||
|
Footwear |
|||
|
Personal products |
|||
|
Tobacco |
Tobacco |
||
|
Healthcare |
Healthcare |
Health care equipment & services |
Health care providers |
|
Medical equipment |
|||
|
Medical supplies |
|||
|
Pharmaceuticals & biotechnology |
Biotechnology |
||
|
Pharmaceuticals |
|||
|
Consumer services |
Retail |
Food & drug retailers |
Drug retailers |
|
Food retailers & wholesalers |
|||
|
General retailers |
Apparel retailers |
||
|
Broadline retailers |
|||
|
Home improvement retailers |
|||
|
Specialised consumer services |
|||
|
Specialty retailers |
|||
|
Media |
Media |
Broadcasting & entertainment |
|
|
Media agencies |
|||
|
Publishing |
|||
|
Travel & leisure |
Travel & leisure |
Airlines |
|
|
Gambling |
|||
|
Hotels |
|||
|
Recreational services |
|||
|
Restaurants & bars |
|||
|
Travel & tourism |
|||
|
Telecommunications |
Telecommunications |
Fixed line telecommunications |
Fixed line telecommunications |
|
Mobile telecommunications |
Mobile telecommunications |
||
|
Utilities |
Utilities |
Electricity |
Electricity |
|
Gas, water & multiutilities |
Gas Distribution |
||
|
Multiutilities |
|||
|
Water |
|||
|
Financials |
Banks |
Banks |
Banks |
|
Insurance |
Nonlife insurance |
Full line insurance |
|
|
Insurance brokers |
|||
|
Property & casualty insurance |
|||
|
Reinsurance |
|||
|
Life insurance |
Life insurance |
||
|
Financial services |
Real estate |
Real estate holding & development |
|
|
Real estate investment trusts |
|||
|
General Financial |
Asset managers |
||
|
Consumer finance |
|||
|
Specialty finance |
|||
|
Investment services |
|||
|
Mortgage finance |
|||
|
Investment instruments |
Equity investment instruments |
Equity investment instruments |
|
|
Non-equity investment instruments |
Non-equity investment instruments |
||
|
Technology |
Technology |
Software & computer services |
Computer Services |
|
Internet |
|||
|
Software |
|||
|
Technology hardware & equipment |
Computer Hardware |
||
|
Electronic Office Equipment |
|||
|
Semiconductors |
|||
|
Telecommunications Equipment |
|||
|
Basic data obtained from: jse.co.za |
|||
Table 1: FTSE / Dow Jones industry classification system (industry classification benchmark - ICB)
All countries have different indices. The South African equity indices, called the FTSE/JSE Africa Index Series, are shown in Box 1.
|
HEADLINE INDICES |
|
Top40 - (tradable) |
|
Mid cap |
|
Small cap |
|
All share |
|
Fledgling |
|
TRADEABLE INDICES |
|
Gold mining |
|
Resource 20 |
|
Industrial 25 |
|
Financial 15 |
|
Financial & industrial 30 |
|
ALL SHARE INDUSTRY (ECONOMIC SECTOR) INDICES |
|
Oil & gas |
|
Basic materials |
|
Industrials |
|
Consumer goods |
|
Health care |
|
Consumer services |
|
Telecommunication |
|
Utilities |
|
Financials |
|
Technology |
|
ALL SHARE SECTOR INDICES |
|
Oil & gas producers |
|
Oil equipment & services |
|
Chemicals |
|
Forestry & paper |
|
Industrial metals |
|
Mining |
|
Construction & materials |
|
Aerospace & defence |
|
General industrials |
|
Electronic & electrical equipment |
|
Industrial engineering |
|
Industrial transportation |
|
Support services |
|
Automobiles & parts |
|
Beverages |
|
Food producers |
|
Household goods |
|
Leisure goods |
|
Personal goods |
|
Tobacco |
|
Health care equipment & services |
|
Pharmaceuticals & biotechnology |
|
Food & drug retailers |
|
General retailers |
|
Media |
|
Travel & leisure |
|
Fixed line telecommunications |
|
Mobile telecommunications |
|
Electricity |
|
Gas, water & multiutilities |
|
Banks |
|
Non-life insurance |
|
Life insurance |
|
Real estate |
|
General financial |
|
Equity investment instruments |
|
Software & computer services |
|
Technology hardware & equipment |
|
ALL SHARE SUBSECTOR INDICES |
|
Gold mining |
|
Coal |
|
Diamonds & gemstones |
|
Platinum & precious metals |
|
General mining |
|
SECONDARY MARKETS |
|
Development capital |
|
Venture capital |
|
SPECIALIST INDICES |
|
SA all share financials & industrials |
|
Property unit trust companies |
|
Property loan stock |
|
SA all share industrials |
|
SA listed property index |
|
Capped property index |
|
Dividend+ index (launched in 2006) |
|
SHAREHOLDER WEIGHTED INDEX SERIES |
|
Shareholder weighted top 40 |
|
Shareholder weighted all share |
|
JSE SRI INDEX |
|
JSE SRI Index |
|
STYLE INDEX SERIES |
|
Style all share value |
|
Style all share growth |
|
Source: jse.co.za |
Box 1: FTSE/JSE Africa index series
