Looking to invest in ASX 200 stocks? Here’s what you should know

Summary

• The ASX 200 index, which includes the 200 largest stocks by float-adjusted market cap, has done well in the last 12 months, delivering a 24+% return (as of 18 June 2021).
• Factors impacting the ASX 200 performance include economic events, corporate news, the Company’s earnings, interest rate and strength of the Australian dollar.
• To invest in ASX 200, one can opt for ETFs or can directly purchase individual shares from within the index.
• Key strategies to follow while investing include sticking to your investment style, studying charts and price actions, conducting technical analysis, and keeping oneself updated.

The S&P/ASX 200 or ASX 200 includes the 200 largest stocks by float-adjusted market cap. The benchmark index is designed to measure the performance of these 200 listed stocks.

The ASX 200 index was launched in April 2020 and is rebalanced quarterly to ensure that the included stocks fulfil the eligibility criteria of the index.

How can one invest in ASX 200?

Investors are attracted to the benchmark index as it contains the biggest companies in Australia. Another significant advantage is that it is a comparatively low-risk investment and designed for steady and long-term growth. The index also helps investors sense the position of the market.

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Although there is a difference between trading and investing, they help you get familiar with the price movement on the ASX.

Trading on ASX 200 is possible via CFDs or contract for differences. CFD is a financial contract that pays the difference in the settlement price between opening and closing trades. In this process, the person requires initial capital, which should be 0.5% of the trade size. CFD helps in speculating on ASX 200 rising or falling. 

On the other hand, if someone wants to invest in ASX 200, he/she can either opt for ETFs or directly purchase individual shares from within the index as per the market price.

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Factors influencing the ASX 200 performance

Several factors influence the performance of the ASX 200 index. Some of them include:

• Economic event: If a natural disaster or calamity like the COVID-19 pandemic occurs, the ASX 200 performance would be adversely affected.
• News Report: Any big announcement by the constituent companies in the index would directly influence the overall index performance. The level of impact would depend on the size and nature of the announcement.
• Earnings Announcement: If a member delivers a strong earnings report, it will significantly impact index performance.
• Interest rate: Any decision related to the interest rate declared by the RBA directly influences ASX 200. In case of a higher interest rate, borrowing reduces and can impact earnings growth. This causes the stock price to fall on the ASX.
• Stronger Australian Dollar: If the strength of the Australian dollar increases compared to other currencies, it will act as a tailwind for the index.

Key strategies to follow while investing in ASX 200 stocks

Every individual has his/her strategy to invest in ASX 200 stocks. However, some of the most popular strategies suggested by experts include:

• Diversification across ASX 200 shares: Experts suggest that it is always wise to invest in multiple stocks instead of going for just one. Through diversification, investors can minimise their risk. Specific to the ASX200, one could achieve this by either buying select shares from the index across different industries or simply opting for ETFs.

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• Hold shares for a longer duration: Patience is the key here is as it is advisable to have a long-term outlook while investing in the stock market. Successful investors like Warren Buffet always go for long-term investment strategy.
• Have faith in your investment strategy: In general, beginners tend to panic and get stressed out if their strategies don’t work and they start seeing losses. Investment gurus suggest that once an individual has finalised an investment strategy, he/she should not worry about the short-term results and continue with his/her strategy.

Although it is easy to get influenced by the day-to-day news or activities, one must believe in his/her strategy and ignore the noise. Sticking to your strategy would help you reach your long-term investment goals.

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