- The stock indices measure the movement in value of the market or various sectors across the market.
- The indices provide a broad idea about the behaviour of the market.
- There are broadly five types of indices – capitalisation, fixed income, sector, strategy, and volatility.
The stock indices measure the movement in value of the market or various sectors across the market. They provide a broad idea about how the market is behaving.
For instance, ASX 200 tracks the overall performance of the top 200 Australian-listed companies, weighted by market capitalisation (m-cap). The All Ordinaries tracks the top 500 Australian-listed companies by m-cap.
There are specific subsets of these indices known as sub-indices. Investors can also trade these sub-indices such as ASX 200 resources or ASX 200 materials to gain specific exposure to different parts of the Australian sharemarket.
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Types of indices
There are broadly five types of indices – capitalisation, fixed income, sector, strategy, and volatility. However, for investors and traders, the most relevant of these indices are capitalisation and sector indices.
Capitalisation – A comprehensive range of indices that represent the sum of the market capitalisation of the companies making up the index.
The type includes ASX 20, ASX 50, ASX 100, ASX 200, ASX 300 Index, ASX MidCap 50, All Ordinaries, ASX Small Ordinaries, ASX All Australian 50, ASX All Australian 200, ASX 200 Net Total Return, ASX Emerging Companies Index and Accumulation indices.
Sector - Sector indices enable investors to benchmark the performance of a particular stock market sector or industry.
The type includes ASX All Ordinaries Gold, ASX All Technology, ASX 200 A-REIT, ASX 200 Banks, ASX 200 Communication Services, ASX 200 Consumer Discretionary, ASX 200 Consumer Staples, ASX 200 Energy, ASX 200 Financial, ASX 200 Financials excluding A-REIT, ASX 200 Health Care, ASX 200 Industrials, ASX 200 Information Technology, ASX 200 Materials, ASX 200 Real Estate, ASX 200 Resources and ASX 200 Utilities.
The ASX 200, maintained by Standard & Poor's, is the most widely cited index that measures the Australian market’s overall performance.
According to ASX, the index is “recognised as the investable benchmark for the Australian equity market, it addresses the needs of investment managers to benchmark against a portfolio characterised by sufficient size and liquidity”. The ASX 200 is comprised of the ASX 100 plus an additional 100 stocks.
A few major constituent stocks of the S&P/ASX 200 index are The A2 Milk Company, BHP, Commonwealth Bank of Australia, ALS, and Altium.
The ASX 200 is capitalisation-weighted. It means that the contribution of stock to the index is relative to its total m-cap. In addition, the benchmark index is also float-adjusted, implying the absolute numerical contribution to the index is relative to the stock's value at the float of the stock.
Dominated by large companies
Launched in April 2000, the index is rebalanced by Standard and Poor’s each quarter to ensure that the constituent stocks meet the eligibility criteria. The index is seen to be dominated mainly by large companies.
The largest ten companies listed on the index accounted for more than 46% of the index as of June 2021.
While four out of 10 stocks belonged to the banking groups, financials accounted for just over a third of the index.
Materials (Resources) was the second-largest group, at 20.6%. In June 2021, the index had a trailing P/E ratio of 65.72 and a dividend yield of 2.8%.
Investors can also trade in exchange-traded funds (ETFs) and exchange-traded notes (ETNs) based on the ASX 200. There are also options and options on futures available for trading. The index provides a monthly fact sheet of investible products related to the ASX 200.
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Furthermore, the ASX 200 VIX index, which S&P Dow Jones publishes, measures the 30-day implied volatility of the Australian sharemarket. The investors use the volatility index to measure the level of risk present in the market while going ahead with investment decisions.