The primary role of an index is to represent as faithfully as possible all the activity and all the movements of securities involved in an exchange.
Consequently, the underlying selection criteria for an index are very important. In most international financial markets, the trend is to use so-called "market" or "weighted" indexes to represent market activity (e.g. CAC 40 in Paris, France; TSX 300 in Toronto, Canada; S&P 500 in New York, USA; IFCG index from the International Financial Corporation, an affiliate of the World Bank).
All these indexes take into account the market capitalization of the various securities, to which are added a certain number of secondary criteria; for example, transaction volume per session, transaction frequency, etc.
The BRVM index follows this trend. Its formulation is identical to that of the IFCG index, and its admissibility criteria are as follows:
- The issuer must be incorporated in one of the WAEMU countries and reside there for tax purposes.
- Only common shares are admissible, so investment funds are not included in the index.
This index is published along with the BRVM Composite which comprises all the securities listed on the exchange. The same method is used to calculate both indexes.
BRVM 10 Selection Criteria and Features
The BRVM 10 comprises the ten most active companies on the regional exchange. Besides the above-mentioned general criteria, , the concept of liquidity plays a key role in selecting securities:
- The average daily number of transactions on a security the during the three months preceding the quarterly review must not fall below the average daily numbers of transactions for all securities.
- Transaction frequency should always be higher than 50%, that is, the security should be traded at least one out of two times during the three-month study period.
Also, the index is revised four times a year (first Monday of January, April, July and October).
Index Calculation Method
Formula:
It = ( Ct / Bt) * 100
Y
Ct = ∑ Pit * Nit
i=1
Bt = Bt - 1 (Ct’ / Ct)
It : Index at time t
Ct : Capitalization of components at time t
Ct’ : Adjusted capitalization (to take into account capital increases or decreases and component changes)
Bt : Baseline of index at time t
Pit : Price of security i at time t
Nit : Number of stocks of value i in circulation at time t.
Calculation and Distribution
The index is automatically generated by the BRVM trading system and distributed after every trading session.
Index Adjustment
The index is adjusted when a component issues new securities (capital increase), buys back securities in circulation (capital decrease) or is replaced in the index. The purpose of the adjustment is to neutralize the change so it does not affect the index.