Performance Index

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Introduction

The notion of Performance is widely used in all aspects of the business and finance world. Whether we’re talking about marketing, manufacturing, IT, supply chain management, government or the markets, performance should be noted and quantified. And what better way to keep track of your company’s development than a Performance indicator.

Essential assumptions

The Performance indicator or a more familiar term, KPI (key performance indicator), is an industry term that measures the performance. Generally used by organizations, they determine whether the company is successful or not, and the degree of success. It is used on a business’ different levels, to quantify the progress or regress of a department, of an employee or even of a certain program or activity. For a manager it’s extremely important to determine which KPIs are relevant for his activity, and what is important almost always depends on which department he wants to measure the performance for.  So the indicators set for the financial team will be different than the ones for the marketing department and so on.

Similar to the KPIs companies use to measure their performance on a monthly, quarterly and yearly basis, the stock market makes use of a performance indicator as well, although on the market, the performance index is calculated on a daily basis. The stock market performance indicates the direction of the stock market as a whole, or of a specific stock and gives traders an overall impression over the future security prices, helping them decide the best move. A change in the indicator gives information about future trends a stock could adopt, information about a sector or even on the whole economy. The financial sector is the most relevant department of the economy and the indicators provide information on its overall health, so when a stock price moves upwards, the indicators are a signal of good news. On the other hand, if the price of a particular stock decreases, that is because bad news about its performance are out and they generate negative signals to the market, causing the price to go downwards. One could state that the movement of the security prices and consequently, the movement of the indicators are an overall evaluation of a country’s economic trend.

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Calculation

The market performance indicator is extremely easy to calculate. On a stock market table, investors can observe the price changes from day to day as a difference between the prices a stock registered when it closed yesterday and the price it will have when closing today. The dollar difference between prices is called Net Change and it can be positive or negative. As it is quoted in dollars, net change is used in technical analysis to evaluate stock prices. For example, if stock X closed at $12 yesterday and at $12.75 today, the net change is $ 0.75.

The Performance Index determines a security’s price performance and displays it as a percentage, so it shows the price as a normalized value. In general terms, normalization means to set the data of one sample, in this case, a price and then calibrate all the rest of the data according to that reference price. Thus, to implement normalization to the net change implies the choice of a reference price (yesterday’s closing price) and the calculation of gain/loss factors for the next sample (today’s closing price) in the first place.

In our previous example, the Performance indicator will show the net change in the form of a percentage, and the value would be of 6.25. This would indicate an increase in the stock price of 6.25%. As well as the net change, the Performance index can be negative. For example, if the price of a security at yesterday’s closing was of $12 and today it closed at $11.75, the net change is $-0.25 and the performance indicator will have a value of -2.08 so the instrument has decreased  2.08% in price since yesterday.

Interpretation

The Performance index is used to determine market trends (stock markets, currency markets, commodities etc.). When the index movements show a positive trend, an upward movement on a chart, then the market performance is called bullish. A bull market is represented not only by high prices, but by a trend in high prices that tend to go higher. On the other hand, when the index shows a negative value, then the market performance is called bearish. The characteristics of a bear market are: low prices and a continual downwards movement that ultimately creates a trend. Bullish/Bearish markets may hold for weeks or even months, but when a movement is continual for a period longer than five years up to 20 it is known as a Secular Trend, even if occasional corrections occur.

Conclusion

When investors go on Marketwatch, they guide themselves with the use of performance indicators. Nowadays, plenty indicators have been developed to better forecast market trends, but an easy, accurate and clear indicator is the Performance Index. Representing the net change in security prices form one day to another, it displays the result in the form of a percentage. If an economy’s performance is good, the stock market will also have a good performance and bull markets are inevitable. They are characterized through positive Performance indexes that tend to move upwards, oppositely to the bear markets that are described with negative Performance indicators. To understand and forecast market trends, you basically need to have a good grip on mathematics and sometimes, something as easy as the percentage (as a mathematical tool), will help you determine price movements.