KSE-100 Index

The KSE-100 Index is the main benchmark index of the Pakistan Stock Exchange (PSX). It tracks the share prices of 100 listed companies, chosen to represent the market's sectors and its largest firms, and weights each one by its free-float market capitalisation. The index was introduced in November 1991 with a base value of 1,000 points, when it belonged to the Karachi Stock Exchange, which is where the "KSE" in its name comes from.

In January 2016 the Karachi, Lahore and Islamabad stock exchanges were integrated into a single national exchange, the PSX, under the Stock Exchanges (Corporatisation, Demutualization and Integration) Act, 2012. The index kept its name and history. It is the figure quoted in Pakistani news as "the market", and it is the standard yardstick for equity funds investing in Pakistan.

Picture a scoreboard at a bazaar that shows, in one number, how the hundred biggest and most important shops are doing. When the big shops' values rise, the number climbs; when they fall, it drops. The KSE-100 is that scoreboard for Pakistan's stock market.

Two things make it more than a simple average. Bigger companies count for more, because a rise at a giant bank or oil company affects investors more than a rise at a small textile mill. And only the shares that can actually be bought and sold are counted, so a company mostly owned by its founding family or the government does not dominate the scoreboard just because it is large on paper.

The KSE-100 is a stock market index weighted by free-float capitalisation. Its level is:

• $P_i$ is the current share price of company $i$.
• $N_i$ is the number of shares the company has issued.
• $F_i$ is the free-float factor, the fraction of shares available for trading.
• $D$ is the divisor, set so the index equalled 1,000 at the base date and adjusted for changes in the constituent list and for corporate actions.

As a simple example, suppose a company has 100 million shares priced at Rs 200 and a free-float factor of 0.40. Its counted value is 100 million times Rs 200 times 0.40, or Rs 8 billion, rather than its full market capitalization of Rs 20 billion. If its price rises 10% while every other constituent is unchanged, the index total rises by Rs 0.8 billion, and the index moves by that amount divided by the divisor.

PSX's methodology defines free float as the shares readily available for trading. It excludes holdings of sponsors and directors with control, government holdings as promoter, cross-holdings between associated companies and other locked-in shares. The resulting percentage is rounded up to the next multiple of five and placed in one of 20 bands, from 0.05 to 1.00.

Under the rules published by PSX, the index is built in two parts. One company is taken from each sector of the exchange, except open-end mutual funds, choosing the company with the largest free-float capitalisation in that sector. The remaining places are then filled by the largest companies by free-float capitalisation regardless of sector. The exchange states that the selection captures around 80% of the free-float capitalisation of all listed companies.

The constituent list is reviewed periodically by PSX's index committee. Companies can be removed if they are suspended, delisted or no longer meet the size and trading rules, and new listings can join once they qualify.

Until 2012 the KSE-100 was weighted by total market capitalisation. PSX's Index Expert Committee recommended a switch to free-float weighting early that year, the board ratified it on 24 April 2012, a parallel free-float version was calculated from 11 June 2012, and the recomposed index took effect on 15 October 2012. The change brought the index in line with the method used by major international index providers and reduced the influence of tightly held companies.

The methodology document also describes the KSE-100 as a total-return index, adjusted for dividends, bonus shares and rights issues. That makes its long-run record higher than a price-only measure would show.

PSX publishes several other indices. The All Share Index covers every listed company and gives a broader view. The KSE-30 tracks a narrower group of the largest and most actively traded companies, and the KMI-30 tracks shares that meet Shariah screening criteria for Islamic finance investors.

The KSE-100 is used as a benchmark by mutual funds, pension funds and foreign portfolio investors, and as a barometer of confidence in Pakistan's economy. It reacts to monetary policy decisions of the State Bank of Pakistan, the country's central bank, because the policy rate drives yields on Market Treasury Bills and Pakistan Investment Bonds, which compete with shares for savers' money. It also responds to the exchange rate of the Pakistani rupee, to news about International Monetary Fund programmes and to political events.

Because scheduled banks, oil and gas, fertiliser and cement companies make up a large share of the index, movements in a few sectors can drive the whole. Investors comparing it with markets abroad usually look at returns in US dollars as well as in rupees, since currency moves can change the picture. The index is one gauge of Pakistan's wider capital market, and its valuations are closely tied to benchmark rates such as KIBOR and interest rates.

• Pakistan Stock Exchange
• Pakistan Stock Exchange: Free-float based KSE-100 Index methodology