How To Trade or Invest in the ASX 200

How To Trade or Invest in the ASX 200

Reading time: 7 minutes

The S&P/ASX 200 (or ASX 200) tracks the performance of the 200 largest companies listed on the Australian Securities Exchange (ASX). Serving as a leading benchmark for the Australian stock market, this index houses a range of sectors and offers a look into how the economy is performing. Like many major equity indexes, the ASX 200 is weighted by market capitalisation, meaning the most influential companies in terms of market value will exhibit a greater influence on the overall price of the index.

Companies in the materials sector make up 24.2% of the ASX 200 stock market index as of July 2023, with globally-recognised firms like BHP Group Ltd. (BHP) and Rio Tinto (RIO) ranking highly. The financial services sector represents an even larger component, accounting for 28.4% of the index’s weight and including heavyweight players like the Commonwealth Bank of Australia (CBA), National Australia Bank Ltd. (NAB), and Westpac Banking Corp (WBC).

While the above represents the two most significant sectors, the rest of the ASX 200’s share market is diverse, ranging from healthcare and communication services to consumer products and technology. For instance, biotech firm CSL Ltd (CSL) holds a considerable weight, just below CBA and BHP.

Differences Between Trading and Investing

Trading and investing offer two distinct approaches to engaging with global markets.

Trading typically involves attempting to generate a return from short-term price fluctuations. Traders buy and sell frequently, placing more weight on recent trends and technical analysis.

Investing, on the other hand, is a long-term approach with the goal of accumulating wealth over several years and beyond. Investors focus on financial markets that will grow in value over time, ignoring short-term volatility and often reaping benefits like dividends.

Trading (Investing) in the ASX 200

Engaging with the S&P/ASX 200 index presents a unique blend of opportunities, given the index’s rich diversification.

Instruments and Brokers

ASX 200 financial instruments can be traded in a number of different ways, from index futures to options contracts and Exchange-Traded Funds (ETFs), to CFDs (Contract for Differences). CFDs are derivatives that allow traders to speculate on the direction of the ASX 200 without owning the underlying asset (as is the case with all market averages, these indexes can never be traded directly anyway; they are always cash-settled instruments). CFDs can be traded with low costs, leverage, and high liquidity.

Regarding a brokerage trading account, it’s best to search for one with deep liquidity, competitive pricing, fast execution and a broker that is regulated. Robust trading platforms and excellent customer support are also desirable. At FP Markets, we pride ourselves on offering all the above and more, with the ASX 200 available to trade via CFDs, along with many more popular asset classes.

Technical Analysis

The objective of technical analysis is to essentially forecast future price action based on previous data. While performing technical analysis on the ASX 200 can be a complex task, here are some key concepts to help you get started:

  • Chart Patterns: Mastering chart patterns, like head and shoulders, double tops, and wedges, can help traders spot potential price reversals or trend continuations before they happen.
  • Technical Indicators: Indicators, including moving averages, the RSI, and the MACD, can offer insight into momentum and identification of trends.
  • Support and Resistance: These levels are often key in determining future price movements and form the backbone for many technical trading strategies.

Many traders also blend fundamental analysis into their trading ideas, but it depends on their particular strategy.

Fundamental Analysis

Long-term investors often rely on fundamental analysis to influence their decisions. This involves evaluating the broader Australian economy, like its GDP growth, unemployment and interest rates.

Understanding the key sectors in the ASX 200, like materials and financial services, is also crucial. Monitoring individual companies’ earnings, valuations, and industry trends within the ASX 200 provides real-time insights into potential growth drivers. Lastly, it's worth considering global macroeconomic factors, given Australia's heavy reliance on exports, especially in mining and agriculture.

Risk Management

For those trading the ASX 200, risk management helps them stay in business. Protective stop-loss orders, as their name implies, help prevent, uncontrollable losses in volatile markets by automatically liquidating a position at a predetermined price.

The scope of risk management is broad, though for the purpose of this article, understanding the need to employ protective stop-loss orders, and understanding the need to adopt solid trade management skills is vital. In addition, learning how to size one’s position is critical, which helps ensure traders don't overexpose themselves to risk.

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