Expert panel The market goes up and down every day – but how is this figure calculated? Steve Mater, Institutional CFDs and Business Development, MF Global
We hear a figure quoted about the Stock Exchange going up or down every day. I am asking you to please explain how this figure is calculated.
Today's expert: Steve Mater, MF Global
When financial commentators refer to the Australian share market, or the Australian Securities Exchange (ASX), dropping by 120 points, or down 2%, they are normally referring to the All Ordinaries Index (XAO).
This Index is Australia’s premier market indicator. It is comprised of the aggregate market value of the largest 500 companies on the ASX.
The XAO, or All Ords as it is affectionately known, was introduced in 1979 and the number of stocks comprising the index varied between 299 and 330 companies. However, in April 2000, the ASX revamped the Index to include 500 companies of the 1300 shares currently listed. This accounts for 99% of the value of the share market.
Other share Indexes comprised from the ASX share market include:
(1) All Industrials – a measure of the price movements of about 220 industrial companies; (2) All Resources – follows the share price movements of selected mining and exploration companies; (3) ASX 200 – measures the top 200 companies by market capitalisation. It accounts for approximately 97% of the total market value of the ASX. Many companies (mainly fund managers, hedge funds and CTA’s) now use the ASX200 as the “benchmark” Index so as to pass on returns equivalent to that of the stock market on an annual basis. The ASX 200 Index on average has returned approximately 12% p.a. for the last 5 years; (4) ASX 100 – measures the top 100 companies by market capitalisation; (5) ASX 300 – measures the top 300 companies by market capitalisation; (6) ASX 50 – measures the top 50 companies by market capitalisation; (7) ASX 20 Leaders – the “blue chip” index, following share price changes on the top 20 largest companies by market capitalisation; and (8) Specific industry indexes, each measuring share price movement of various different industries including banking and media indexes.
These indices are complied by Standard and Poor’s (S&P), an international financial data research company and a leading provider of equity indices around the world.
Companies in all ASX indexes are weighted according to their market capitalisation. This means that the largest companies have a larger impact on movements in the index than smaller companies. This is sensible since a large movement in a relatively small company will not affect the index, whereas a large movement in a share that is widely held will have a big impact. Share price indexes only measure the capital gain or loss experienced by shareholders through fluctuations in share prices and do not take into account dividends earned.
The ASX periodically reviews the composition of the various indices and may make changes in order to create a better representative index. Large new floats, such as Telstra can substantially affect the weighting of a sector or index, and thus the percentage weightings of all other indices. The natural changes in percentage weightings for sub-indices occur by virtue of the changing prices of the included stocks.
For example, in the mid 1990’s the All Resources Index represented greater than 23% of the All Ords. However, weakness in commodity markets resulted in declines in many resource share prices in the second half of the nineties. By late 1999, the All Resources Index was worth only 16% of the All Ords. At the same time, the economic environment was favourable for the banking sector. The representation of banking in the All Ords increased substantially as the share prices of banks rose.
It will be interesting to see what changes to the composition of the ASX indices occur following the recent market turmoil.
Disclaimers: The views expressed in this article are those of Steve Mater, a representative of MF Global and is not intended as general advice. This does not constitute a recommendation nor does it take into account your investment objectives, financial situation nor particular needs.
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