Want to know what is ASX200 and how to invest in it wisely? Good! This guide will include everything you need to know about ASX200.
The S&P/ASX200 ( also known as Australia 200) is an index of the top 200 public companies in the Australian Securities Exchange (ASX), ranked by market capitalisation. Created at the turn of the millennium, the ASX200 is similar to other indices traded across the world including the DAX, NASDAQ, Nikkei and FTSE. It is measured in points, and it mirrors the combined movements of the 200 Australian stocks that make up the index.
ASX200 is a good index to own. Every quarter, the ASX200 is rebalanced. Firms that no longer qualify for a position in the index are replaced by others that have qualified using data from the previous six months. The index goes up or down over each trading day, as investors buy and sell shares in the constituent companies.
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There are three main eligibility criteria that all stocks must fulfil before they are added to the ASX200 index. They include the following:
√ The stock must be currently one of the listed stocks on the Australian Securities Exchange.
√ The stock must meet a liquidity benchmark. The liquidity of the stock refers to how regularly it is traded, and the volumes that move around at every interval. The movements must not be controlled by a handful of investors. A stock that meets the ASX200 liquidity requirements can be easily bought or sold without deeply affecting the market.
√ The company’s float-adjusted market capitalisation must be among the 200 biggest on the ASX. This discounts the issuing of new shares or large strategic holdings by a small cluster of investors.
Companies that meet these conditions are added to the index, but only every quarter. This means that companies that do not meet these criteria will remain listed in the index until the next rebalancing window.
The ASX200 is capitalisation-weighted. Any company’s contribution to the index is relative to its total market value (share price X number of tradable shares). The movement of the index only shows the changes in the share price and not the market capitalisation.
There are other indices based on the Australian Securities Exchange. These include S&P/ASX20, S&P/ASX50, S&P/ASX300, and the All Ordinaries.
The ASX20, ASX50, and ASX300 are similar to the ASX200 with the only difference being that they track the top 20, 50, and 300 stocks in the Australian Securities Exchange. The All Ordinaries (ALLORDS), tracks the top 500 stocks based on float-adjusted market capitalization.
Today, the top 20 companies included in the ASX 200 (by market capitalisation) include:
1. Commonwealth Bank
2. BHP Billiton Ltd
3. Westpac Banking Corp
4. CSL Ltd
5. ANZ Banking Group Ltd
6. National Australia Bank
7. Macquarie Group Ltd
8. Woolworths Ltd
9. Wesfarmers Ltd
10. Telstra Corporation
11. RIO Tinto Ltd
12. Woodside Petroleum
13. Transurban Group
14. Goodman Group
15. Scentre Group
16. SOUTH32 Ltd
17. Brambles Ltd
18. Newcrest Mining
19. Fortescue Metals Group
20. Suncorp Group Ltd
The sectors that make up the ASX 200 indices include Financials, Materials, Industrials, Consumer Staples, Health Care, Telecommunications Services, Energy, Consumer Discretionary, Utilities and Information Technology.
What are the Trading Hours of the S&P/ASX200?
The trading hours of the ASX200 is 10 am to 4 pm Sydney Time (GMT+11).
There are 3 major ways to invest in the ASX 200 Index. They are covered below:
›› Buying Individual Stocks
›› Buying ETFs
›› ASX200 CFDs
1. Buying Individual Stocks
Since the top 200 stocks that make up the index are publicly listed, you can create a portfolio that contains the 200 stocks, rebalancing the portfolio in line with changes to the index. However, this approach is time-consuming and very costly, especially when you consider the brokerage or management fees involved.
You may be tempted to only buy the top 10 or 20 stocks, but this means you are no longer investing the ASX200. The overall costs of maintaining such a portfolio may be cheaper, but it could be a lot more volatile.
2. Buying ETFs Based on the ASX200
Exchange-Traded Funds (ETFs) are a special type of investment vehicles that is a basket of other investment options—in this case, the 200 companies that make up the ASX200. The shares in an ETF are offered to investors on a stock exchange just like other stocks.
The big advantage of this option is that you don’t have to worry about managing a portfolio with 200 companies and the costs of holding the investment are typically very low. Additionally, anyone can buy an ETF with as little as $200, and once you buy shares in an ETF that tracks the ASX200; your investment is automatically diversified.
Some of the top ETF options for investing on the ASX200 include:
· State Street Global – SPDR S&P/ASX 200 Fund (ASX: STW)
· iShares (Blackrock) – iShares S&P/ASX 200 ETF (ASX: IOZ)
· BetaShares – BetaShares Australia 200 ETF (ASX: A200)
You can also talk to your local stockbroker for similar alternatives. However, ASX200 ETFs are not without their downsides.
Firstly, the costs may be higher if you are comparing them to single stocks instead of other funds baskets. Additionally, the diversification of the ASX200 index is overstated. This is because presently, the “Financials” sector controls more than 47% of the index. So any economic problems that affect this sector will hurt the returns generated on the ETF and its overall value.
Finally, ETFs don’t allow room to take advantage of the daily fluctuations of the ASX200. Investors only make money when the index closes in the green at the end of a period. In bear markets, (such as the 2008 financial crisis and the 2020 COVID-19 crisis), investors are either forced to liquidate their holdings or risk losing any profits already made by their investments.
3. Trading ASX200 CFDs
ASX 200 index CFDs offer you the chance to profit from the movement of the ASX200 –in BOTH directions. It is usually denoted as AUS200 at most CFD brokers.
This instrument tracks the movement of the index daily, and traders can buy the index in a bullish market, or sell it in a bearish market as they attempt to make money. With this option, you are TRADING or SPECULATING, as against INVESTING.
You DO NOT own any shares in the underlying components of the ASX200. You are simply betting on the future movement of the index—the future being anything from five minutes to months.
The advantages of trading ASX200 CFDs
● The possibility of making money in both directions
Investors in the stock market may find it difficult to make money during certain market conditions. CFD traders don’t have this problem. As an ASX200 CFD trader, you only need to be on the right side during a bullish or bearish market for a chance to make money.
● The possibility of making more money using leverage
Most CFD providers offer leverage for ASX200 CFD trading—which can be up to 1:200. This allows you to control 200 times the capital you put at risk in any trade. So for every $1,000 in your account, you can hypothetically trade $200,000 of ASX200. The only way this would have been possible if you choose to own stocks instead, is to have $200,000 to buy the various stocks—not counting the fees.
● Low transaction costs
To trade ASX200 CFDs with most brokers, you only need to pay the spread and swap rates (if holding positions overnight). These are usually a minuscule fraction of the total transaction. Spreads can be 8 pips and swaps can be as low as 0.0030% of the trade size.
The disadvantages of trading ASX200 CFDs
● Predicting the direction of the index requires deep knowledge of the financial markets. You need to be highly-experienced in technical and fundamental analysis to avoid losing money. This is very important because the combination of leverage and the volatility of the ASX200 index can be devastating for wrong predictions.
● You don’t own any stakes in the companies. Unlike when you buy stocks, your open CFD positions on the ASX200 do not count towards your net worth. This is because profits (or losses) are only actualised when you have closed an open position.
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Choosing any of the three methods highlighted above depends on your specific situation. If you are risk averse, don’t mind paying management fees, and want a long term investment (think 5-10 years) you should weigh the options of buying single stocks or ETFs.
If you have a bit more risk appetite and have a full understanding of trading CFDs and the risks involved, you can consider trading ASX200 CFDs.
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The ASX200 is the most popularly referenced index of the Australian Securities exchange.
Investors and traders around the world track its movement because it is a good barometer of the health of the Australian stock exchange.
If you’d like a chance at making money off the movements of the index, you can buy individual stocks, invest in ETFs, or trade CFDs. Before you choose any of the options, however, it is important to fully understand the risks involved.
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The content presented above, whether from a third party or not, is considered as general advice only. This article does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Mitrade does not represent that the information provided here is accurate, current or complete. For any information related to leverage or promotions, certain details may outdated so please refer to our trading platform for the latest details. Mitrade is not a financial advisor and all services are provided on an execution only basis. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks. *CFD trading carries a high level of risk and is not suitable for all investors. Please read the PDS before choosing to start trading.