A beginner's guide to the ASX 200 index
Index trading can prove a smart way to diversify your investment portfolio. It allows you to speculate on the performance of a group of major companies or sectors, rather than individual stocks.
The ASX 200 is one such index. It's highly liquid and tradable and considered the preeminent benchmark index for Australia. And like any index, having a deep understanding of how the ASX 200 works can improve your prospects and experience trading it.
Read on to begin building that foundation of knowledge.
What is the S&P/ASX 200 index?
The ASX 200 is an index tracking the performance of the top 200 eligible companies listed on the Australian Securities Exchange (ASX). It's a free-float, capitalisation-weighted, real-time tradable index. Its 200 constituents are indicated in its name and denominated in the local currency AUD.
The index was introduced by Standard & Poor's (S&P) on April 3rd, 2000, so is referred to in full as the S&P/ASX 200 index. It's become the most widely followed of the S&P/ASX family of indices created through the partnership of S&P and the ASX.
This is because the ASX 200 is seen as the de-facto measure of Australia's overall equity market. Most other indexes in the S&P/ASX family focus on certain segments. You may also see it labelled the Australia 200 index, thanks in part to its representative nature.
S&P/ASX 200 constituents
The ASX 200 features a broad range of companies from 11 sectors in a bid to provide a balanced view of Australia's equity market. Certain sectors are given greater weighting to account for their role in the country's economy, however. As of October 31st 2022, those with the largest weighting were financials (30.1%), materials (22.1%) and healthcare (10%).
The largest individual constituent was BHP Group Ltd, a company in the materials sector that commanded a 9.3% index weighting. The four next-highest weighted constituents were:
- Commonwealth Bank Australia (financials)
- CSL Ltd (healthcare)
- National Australia Bank Ltd (financials)
- Westpac Banking Group (financials)
The index's top 10 holdings accounted for 48.9% of its market capitalisation.
How is the ASX 200 calculated?
The ASX 200 maintains its benchmark credibility through high eligibility requirements. Aspiring companies need to meet certain standards specified by S&P to gain and retain listed status:
- Must be listed on the ASX (includes both primary and secondary listings i.e. those listed in multiple markets where the ASX isn't the primary exchange)
- Must have a market capitalisation within the top 200 on the ASX based on daily average over the previous 6 months
- Must have a relative liquidity of 50% (relative liquidity is calculated as stock median liquidity divided by market liquidity)
S&P rebalances the index quarterly in March, June, September and December. Companies may gain or lose listing due to their performance against the criteria above relative to others. Any changes take effect after the market closes on the third Friday of each review month.
There are buffers in place to limit the levels of index turnover, however. These limits aim to maximise efficiency and limit the cost of holding the ASX 200 portfolio. Potential inclusions or exclusions must satisfy certain requirements relating to their rank:
- Must be ranked 179th or higher for inclusion in the index
- Must be ranked 221st or lower for exclusion from the index
Calculation of the ASX 200 share price includes a sum of its constituents' market capitalisation. But the index's price movements only occur due to changes in share prices, not market capitalisation. S&P uses a divisor methodology to maintain this continuity and remove influences that don't directly relate to market movements.
What affects the S&P/ASX 200 share price?
Just like all stock indexes, the ASX 200's performance can be driven by a plethora of factors.
- Constituent performance: Significant changes in the performance of individual constituents can drive the index up or down, particularly if they have large weighting. Consequently, relevant S&P/ASX news to monitor includes the earnings reports of listed companies.
- Sector trends: Similarly, broader industry trends are also likely to have implications for the ASX 200, especially those affecting its two major constituent sectors: financials and materials. Another example is rising oil prices hitting reliant sectors such as construction.
- Domestic events: Due to its representative nature, the ASX 200 typically moves in line with Australia's economy. This means wider economic trends – such as the soaring cost of living – can impact the value of the index. Any changes to domestic monetary policy like raised interest rates are also likely to affect investor confidence.
- World events: The ASX 200 isn't immune to the aftershocks of major world events either. It took a tumble during the financial crisis of 2008-2009 and again at the beginning of the COVID-19 pandemic.
How to invest in the ASX 200
It's entirely possible to invest in the individual companies listed on the ASX 200 index. This would mean owning the underlying asset. You would however need to research and monitor individual stocks, without gaining the same level of exposure to the wider Australian market (unless buying all its 200 constituent stocks).
A simpler alternative is to trade the ASX 200 index through contracts for difference (CFDs). A CFD is typically a contract between you (the trader) and a broker, where one party agrees to pay the difference in the value of the index between the opening and closing of the trade. This grants you full exposure to the index and its constituents without actually owning the asset.
CFDs are flexible in that you can trade in both directions by taking long or short positions. This means you can take advantage of both bullish and bearish price movements and trade in a way that suits your strategy.
What are the ASX opening times?
ASX 200 opening times are based on the hours of its underlying stock exchange, the Australian Securities Exchange. Its main trading hours are 10:00–16:00 (GMT+10:00) from Monday to Friday.
With FXCM, you can trade the ASX 200 from Sunday 22:50 until Friday 20:00 GMT. This allows you to take advantage of greater and more diverse opportunities (outside of daily breaks between 05:30 - 06:10 and 20:00 - 22:50).
How much do you need to start trading the ASX 200?
If you're trading the ASX 200 through CFDs, you can open larger market positions with smaller deposits using leverage.
The ASX 200 has a minimum value of AUD$0.1 per point and a target spread of 1.6 pips/points. Bear in mind your per-point value may be different if your trading account is denominated in a different currency.
Benefits of trading the ASX 200 index
There are several potential benefits to both index trading and the ASX 200 specifically.
- Diversification: Index trading, by its very nature, offers quicker and easier access to a wider range of companies and sectors than investing in individual stocks. You'll have greater protection against the price movements of individual stocks too. The ASX 200 itself is also more diverse than other ASX-focused indices thanks to its intentionally representative makeup.
- Liquidity: The ASX 200 is Australia's foremost index, making it a highly liquid asset due to its consistent trading volumes. Major individual constituents such as BHP Group Ltd are too in high demand.
- Volatility: The ASX 200 index is known for having more volatile price movements than some major indexes, presenting attractive opportunities for day traders.
- News coverage: Given its lofty status as the number one index in the 12th largest economy in the world, the ASX 200 receives considerable news coverage. This factor can prove key in supporting your technical and fundamental trading analysis and shaping a useful ASX 200 forecast.
Is trading the ASX 200 right for everyone?
It's important to consider the risks of any trading decision in relation to your strategy and preferences. The ASX 200, like any asset, has potential downsides to counterbalance its upsides.
Its volatility may deter more risk-averse traders, for example. While the index's performance has generally trended upward over time, it's also seen several major crashes over its history. Staying ahead of the news curve can help guide your next move – though S&P/ASX 200 historical data offers no guarantee of future performance.
If you're accessing the index through CFDs, it's also important to understand the risk-and-reward dynamic of trading with leverage. Using leverage has the potential to amplify your profits and losses alike. This means you could lose more than you deposit if the market doesn't go your way.
Start trading the ASX 200 with FXCM
Are you confident the ASX 200 would make a welcome addition to your investment portfolio? If so, it's easy to get set up and begin trading with FXCM. On top of excellent spreads and zero commissions, we offer a range of valuable tools and resources to improve your chances of success.
- Sign up for a free FXCM account or test your skills with a demo account.
- Download your platform of choice: MetaTrader4 or Trading Station. Check our guide to choosing a trading platform if you're not sure which suits you best.
- Add funds to your account to begin trading. Remember you can make smaller deposits when trading with leverage.
- Make your first trade, whether trading the ASX 200 or another asset. Our guide to CFD trading can help you understand the fundamentals.
- Keep developing your trading skills. Our trading education hub has tools, webinars and free advice to strengthen your knowledge and build confidence.
Ready to get started? Then visit our quotes page to view a real-time ASX 200 chart and start trading.
FXCM Research Team
FXCM Research Team consists of a number of FXCM's Market and Product Specialists.
Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.