By Chris Walker,
Money Magazine, February 2010
Want to see at a glance how the sharemarket or market sector is performing? No problem – there’s bound to be a share index to help you.
Tune into any shares report on radio or TV, pick up the newspaper’s financial pages or check out the markets online, and you’ll come across a constant – sharemarket indices.
These provide a simple and revealing indication of how the markets are travelling. Arguably the most quoted Australian sharemarket index is the All Ordinaries, often referred to simply as the “All Ords”.
The UK equivalent is London’s FTSE 100 (often called the “Footsie”), in New York it’s the Dow Jones Index, in Tokyo it’s the Nikkei and in Hong Kong, the Hang Seng.
When a sharemarket index is newly created, its starting day is given a base value. Ongoing changes in the market’s performance are then measured in relation to that opening value.
For example, if the index rose from a starting value of 1000 to 1058, the overall value of the parcel of shares included in this index would have risen by 5.8%.
The S&P/ASX All Ordinaries Index was established in 1980 with a base value of 500. In mid-February, 2010 the index was around 4900, an almost tenfold increase in the share price of the companies.
Since April 2000, the All Ords has tracked the value of approximately 500 of Australia’s largest listed companies by market capitalisation, which effectively accounts for more than 95% of the value of all shares listed on the ASX.
Market capitalisation is calculated by multiplying the number of shares on issue by the share price. For example, the largest company on the ASX, BHP Billiton, has a market capitalisation of around $220 billion and accounts for about 14% of the value of the entire market. The 10 largest companies listed on the ASX account for some 45% of the total market’s capitalisation (as at January 12).
Ten years ago ratings agency Standard & Poor’s launched a number of other key Australian indices, with a narrower focus than the All Ords.
These range from the S&P/ASX 20 index, tracking the market’s 20 largest listed companies, to the S&P/ASX 300, the largest 300 companies.
Probably the most significant and oft quoted is the S&P/ASX 200, made up of the 200 largest companies on the ASX and representing about 78% of the market’s capitalisation. But the old All Ords refuses to lie down and continues to grab most of the attention, certainly from the media.
Most indices are price-only indices, meaning they only measure growth in share prices. For a more complete picture it’s worth looking at the various “accumulation” indices, which include dividends paid by the companies in the index.
The S&P/ASX 300 Accumulation Index, for example, is basically the same as the S&P/ASX 300 Index, except that it assumes all dividends are reinvested in the companies issuing them.
Many managed funds actively manage their investment portfolio and attempt to better a particular index they nominate as their benchmark.
Other managed funds, notably “index” funds, try to replicate the returns of a benchmark index, such as the S&P/ASX 200, by holding shares in the same companies.
Index funds tend to live up to their stated investment return goals, namely to match a specific index’s performance, more reliably than actively managed share funds.
In addition to broader market indices there are market sector indices such as the S&P/ASX 300 Metals and Mining Index, or the S&P/ASX 200 Financial Index which contains companies from the top 200 list (by market size) involved in activities such as banking and insurance.
Indices give you an instant guide to whether a market is rising or falling, be it on a daily, weekly, monthly or annual basis.
Their value to investors is they allow you, quite simply and almost at a glance, to benchmark the performance of your shares against the performance of the overall market or the relevant market sector.
This is vital information in determining which shares to buy, hold or sell, and how to best manage the overall weighting of the share component of your portfolio. Share investing would be more difficult without them! For more information on indices, visit the ASX’s website www.asx.com.au.
http://money.ninemsn.com.au/article.aspx?id=1007144
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