What is the S&P/ASX 200 (AUS200) Index?

What is the S&P/ASX 200 (AUS200) Index?

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The S&P/ASX 200 (AUS200 or ASX 200) index, often referred to as 'the benchmark index' of Australia, is the premier gauge of the Australian Securities Exchange (ASX). The ASX 200 represents the largest and most liquid stocks listed on the Australian stock exchange (by float-adjusted market capitalisation).

It includes leading companies such as Commonwealth Bank Australia (CBA), Telstra Group Ltd (TLS), Wesfarmers Ltd (WES), Macquarie Group Ltd (MQG), National Australia Bank (NAB), ANZ Group Holdings Ltd (ANZ), and BHP Group Ltd (BHP). These are among the top ten constituents by index weight. Regarding sectors, financials contribute 27.1% to the ASX 200 index, followed by materials (23.8%) and healthcare (10.6%). Sectors are classified by GICS (Global Industry Classification Standard).

In simple terms, the ASX 200 offers a comprehensive, real-time snapshot of the Australian equity market, like how the Dow Jones Industrial Average (DJIA) and S&P 500 function in the United States. The ASX 200 index is managed by Standard & Poor's (a ratings agency and index provider that also manages the S&P 500), who are well-regarded experts in equity data analytics.

The Importance of the S&P/ASX 200 Index

Consisting of 200 of the largest companies listed on the ASX, the S&P/ASX 200 represents approximately 94% of the Australian market in terms of market capitalisation, making it a significant benchmark index for Australian investors.

Market participants and commentators alike closely watch this index, as it provides a reliable barometer of the overall health of the Australian economy.

How is the S&P/ASX 200 Calculated?

The S&P/ASX 200 index, launched on 3 April 2000, utilises a float-adjusted market capitalisation method, meaning only the company's freely available shares are considered in the calculation (this calculation method disregards insider shares). The calculation currency for the index uses the Australian dollar (AUD), and the rebalancing frequency is conducted quarterly.

Eligibility for inclusion in the index is based on liquidity and market capitalisation and selected from a pool of ordinary and preferred equities. The share price of each company and its available shares in the public market determine the weightage within the index.

The index divisor is a value chosen to help to maintain the index continuity by eliminating external influences not related directly to the market movement (forms the denominator in the calculation with the numerator comprising the sum of the members’ free-float market cap). For instance, if a company increases its market capitalisation by issuing new shares, the divisor is adjusted so that the value of the ASX 200 does not change.

How to trade ASX 200?

First and foremost, it is important to acknowledge that the ASX 200 is a market average. The index cannot be traded directly; investors must use derivatives.

Trading the S&P/ASX 200 Index through Contract for Differences (CFDs) is a highly efficient and cost-effective method. CFDs are offered by brokers based on the Cash Index (according to Sydney time, the cash market is open from 10:00 AM to 4:00 PM) and the underlying Futures contract.

When using CFDs, traders speculate on the ASX 200's direction without owning it or any constituent shares, taking advantage of leverage and the ability to go long or short. This proves useful during downturns, allowing traders to speculate on falling prices instead of reshuffling portfolios and saving on costs.

Trading on the ASX and through ASX stocks is made possible by FP Markets on the MetaTrader 5 (MT5) and Iress platforms, a leading provider of Forex and CFDs. Without holding the underlying equities, traders can speculate on the direction of the S&P/ASX 200 index by trading CFDs based on the underlying price movement of the index.

Final Thoughts

The S&P/ASX 200 is a robust indicator of the Australian stock market's performance, providing a comprehensive snapshot of Australia's largest and most influential companies. However, investors and traders should note that past performance does not indicate future results, and trading in shares and other financial instruments can involve risk.

This article is written to educate and should not be construed as financial advice. Always conduct thorough research before attempting to trade any financial product.