When you hear the Australian sharemarket rose or fell today, it almost always means the ASX 200. Here’s what that number actually measures.
The S&P/ASX 200 is the benchmark for the Australian sharemarket.
It tracks the share prices of the 200 largest and most actively traded companies listed on the Australian Securities Exchange, rolled into a single number. When that number rises, the value of those companies, taken together, has gone up.
About 2,000 companies are listed on the ASX, but the 200 in the index account for the bulk of the market’s total value. That’s why fund managers, super funds and the news all use it as shorthand for “the market”.
The index is run by S&P Dow Jones Indices, in partnership with the ASX, under published rules.
Companies are ranked by their free-float market value. That’s the value of the shares that are actually available to trade, leaving out large holdings by founders, governments or strategic investors. A company also has to trade often enough to qualify.
Why the big end of town moves the market
The ASX 200 is weighted by size. A company worth $200 billion has far more influence on the index than one worth $2 billion.
That matters in Australia, because the market is dominated by a handful of sectors. The big four banks and the largest miners make up a large share of the index, so a strong day for banks or a fall in the iron ore price can move the whole ASX 200 even if most smaller companies barely change.
The list of companies is reviewed every quarter, in March, June, September and December. To stop companies bouncing in and out, there’s a buffer: a newcomer generally needs to rank well inside the top 200 to join, and an existing member has to fall well outside it to be removed.
Joining the index can matter for a company’s share price. Many super funds and exchange-traded funds track the ASX 200, so when a company is added they typically need to buy its shares, and when one is removed, they sell.
For everyday investors, the ASX 200 is a useful way to measure performance. If your shares rose 5 per cent in a year while the index rose 10 per cent, you did worse than the market as a whole.
It’s also the basis for many low-cost index funds, which simply hold the companies in the index in proportion to their size. And because so much of Australians’ superannuation is invested in local shares, the ASX 200 has a direct line to most people’s retirement savings.
