The ASX 200 is a key performance benchmark for the Australian share market and often serves as a proxy for the health of the broader economy.
If you're new to share trading, this article will give you a deeper understanding of this index, why it's important, what it includes, and how you can invest in ASX 200 shares.
Introducing the ASX 200
The S&P/ASX 200 Index (ASX: XJO), or ASX 200, is an Australian share market index comprising the 200 largest companies (by market capitalisation) listed on the Australian stock market.
These companies are of great interest to investors because the value of larger companies is often perceived to be less volatile.
Some of the companies on the ASX 200 are also blue chips and are among the most traded Australian shares on the market. They're household names in their sector, boasting financial strength and an excellent track record.
What is the Australian Share Market Index?
The Australian Securities Exchange1, or ASX, is a marketplace where listed companies sell shares to investors to raise funds to help finance their business operations. For investors, it's a place to buy and sell their shares.
Although more than 2,000 companies are listed on the ASX, people often talk about what's going on in the stock market by referencing the performance – that is, the combined share price movements – of an index rather than the entire stock exchange.
The ASX 200 and the All Ordinaries Index (ASX: XAO), or All Ords, are Australian share market indices popularly used by analysts and investors. However, many other indices track specific market sectors or particular groups of shares.
The ASX 200 tracks the share price movements of the 200 largest companies listed on the exchange according to their market capitalisation. The All Ords represents the performance of the top 500 companies in the Australian market.
Market capitalisation (often shortened to just 'market cap') is the estimated value of a company based on the number of shares on issue multiplied by the current trading price. To ensure the index continues to reflect the performance of the 200 largest listed companies, Standard & Poor (S&P) rebalances the ASX 200 every quarter in March, June, September, and December.
The importance of the ASX 200
The index doesn't tell the whole story of the entire stock market, but it offers a pretty solid approximation. This is because the ASX 200 accounts for around 80% of the total value of the Australian share market. Therefore, it often serves as a good proxy for the health of the broader Australian economy.
The ASX 200 also serves as a valuable yardstick to compare the performance of an individual stock and even an entire portfolio. Some funds may have the mandate to either replicate or beat the index's returns.
Investing in the index can also help achieve a diversified portfolio since it contains a broad basket of liquid stocks, regularly traded and representing major Australian listed companies.
What does the ASX 200 comprise?
To be included in the ASX 200, a company must be listed as ordinary or preferred shares on the stock exchange. Unlike ordinary shares, preferred shares don't carry voting rights (but come with other perks, like a fixed dividend). Hybrid stocks with equities and fixed-income characteristics are not eligible for inclusion.
Only ASX companies that are both large and liquid enough can become part of the index. In this context, liquidity refers to how easily a company's shares can be bought or sold on the Australian stock exchange. It's measured by how regularly these shares are traded and their trading volume.
The 11 ASX 200 sectors
Here is a breakdown of the 11 sectors making up the ASX 200 index:
- Consumer Discretionary: These companies sell the types of goods and services we like to splurge on when we have excess disposable income. They include luxury brands, high-end electronics, hotels, restaurants, and car companies.
- Consumer Staples: This sector comprises companies that sell the essential items we need to get by in our day-to-day lives. They include food and beverage companies, grocery stores, pharmacies, and even tobacco companies.
- Energy: These are companies involved in oil and gas production and exploration, as well as those that manufacture drilling equipment. Renewable energy companies are typically grouped under utilities.
- Financials: Includes banks and other financial services companies, like asset managers, funds, and insurance companies.
- Healthcare: This sector comprises healthcare providers like hospitals, clinics, and companies producing medical equipment and pharmaceuticals.
- Industrials: Stocks in the industrials sector include construction and engineering companies, commercial and professional service providers, and travel companies, like airlines.
- Information Technology: In this sector, we find computer software and hardware developers, tech services, and companies that build semiconductors.
- Materials: Includes metals and mining companies, as well as those involved in producing chemicals, construction materials, containers and packaging, and paper and timber companies.
- Real Estate: This sector comprises property developers and companies that buy and manage real estate, including real estate investment trusts (REITs).
- Communication Services: Shares in this sector are telcos and media and entertainment companies, including TV broadcasters and advertisers.
- Utilities: The utilities sector mainly comprises electricity, gas and water providers and includes green energy companies.
What are the largest sectors in the ASX 200?
The most dominant sector is the financials sector, which includes the big four Australian banks: the Commonwealth Bank of Australia (ASX: CBA), the National Australia Bank Ltd (ASX: NAB), Westpac Banking Corporation (ASX: WBC), and the Australian and New Zealand Banking Group Ltd (ASX: ANZ).
Top 3 ASX 200 shares
These are the three largest companies currently listed in the ASX 200, according to market capitalisation. They all represent different sectors of the economy: materials, financials, and healthcare.
|BHP Group Ltd (ASX: BHP)||The largest mining company in the world|
|Commonwealth Bank of Australia (ASX: CBA)||The biggest bank in Australia|
|CSL Limited (ASX: CSL)||Leading global biotech company and producer of influenza vaccines|
The largest mining company in the world, BHP currently tops the list as the biggest company listed on the ASX in terms of market capitalisation.
BHP is a diversified mining company with a portfolio of mining assets across the globe. It produces a range of commodities, including coal, iron ore, copper and nickel. As the ASX's leading blue chip, an investment in BHP comes with relatively low risk and exposes investors to a range of commodities markets.
The second largest company on the ASX is the leading bank in the Financials sector. The Commonwealth Bank is one of the country's most recognisable and trusted brands. In addition to retail, commercial and institutional banking, CBA now provides a diverse range of financial services, including superannuation, insurance and broking services.
The Commonwealth Bank was originally established as the country's national bank in 1911 by the Commonwealth Bank Act 1911. The bank has been central to the Australian economy for more than 100 years and even took on central bank powers during the Second World War. The bank was fully privatised in 1996.
The third largest company on the ASX is from the healthcare sector. CSL is a leading global biotech company specialising in developing treatments for rare and severe diseases and producing influenza vaccines and other therapies.
CSL — an acronym of Commonwealth Serum Laboratories — also has more than 100 years of history. It was founded in 1916 to provide Australians with access to quality healthcare, including innovative new treatments for infectious diseases. Since its inception, CSL has improved the health of Australians by supplying insulin, penicillin, and vaccines against influenza and polio.
How to buy and sell shares on the ASX 200
There are two main ways to make share investments in the ASX 200.
You can invest directly by trading shares in companies that are part of the ASX 200.
An ETF allows you to buy the entire basket of stocks featured in the ASX 200 rather than an individual company. It's a relatively low-cost way to earn a comparable return to the index while building a diversified share portfolio.
However, it's important to remember that an ETF still exposes you to market or sector risk. If a key sector declines, then the value of your ETF would likely fall as well.
Should you invest in the ASX 200?
If you are a new investor looking to get involved in the stock market, then the companies that comprise the ASX 200 are an excellent place to start investing. Many of these are recognisable brands, meaning that you probably already have a decent understanding of the products and services they offer and the types of businesses they run.
Given that many companies in the ASX 200 are also blue chips, they are less risky to invest in than small-cap shares.
This is another benefit they offer to new investors – as it means you're less likely to lose significant amounts of capital investing in them. Many ASX 200 shares also pay regular dividends, giving you an additional source of income.