What is the ASX 200 and How Does it Work?


The ASX 200 is the Australian stock market index. It tracks the value of the 200 largest public companies based on their market capitalisation. Market capitalisation is just industry talk meaning value.

It is calculated by taking the stock price and multiplying it by the number of outstanding shares. So for example if XYZ Widgets had 1 million shares valued at $10 each it would have a market capitalisation of $10m.

With that in mind it means that the ASX 200 changes. A company could have the value of its stock go up and break into the top 200. The opposite is also true.

So if at the end of the day you see that the ASX 200 has increased by 1% that means that on average out of the top 200 companies in Australia, there has been a 1% increase in value.

Of course averages can be misleading. A certain sector such as banking may have increased significantly but stocks in the energy sector decreased in value.

Below is the breakdown of the ASX 200 by industry. As you can see financials represent 35% or 1 in 3 companies in the ASX 200.


Chart from http://www.marketindex.com.au/asx200


This chart represents the 1 year return of the ASX 200. As you can see it’s sitting at 3.17%. But as mentioned before just looking at averages is misleading. Let’s look at some other sectors.



Consumer Staple companies have only increased by 1.4% for the 12 months. This represents you food and beverage companies and non-durable household goods. These includes stocks such as Woolworths and Coca-Cola. Generally items that people can’t live without.
*Reading chart = value on left and date down the bottom


And we look at Telecommunication Services they have decreased by 35%. This includes companies such as Telstra.


The ASX 200 is also used as a performance guide. You can invest in a fund that mirrors the exact performance of the top 200 companies in Australia. This would have resulted in a 3.17% gain in 12 months. Fund managers aim to use their own savvy to out perform this index and get better returns for their clients.


The other factor to look at is that shares are the riskiest asset to invest in so you would want a good reward. Cash on the other hand is one of the safest in terms of your capital doesn’t backwards. Over the past 12 months you could have received an almost risk free 3% from a term deposit or 3.17% in shares.


A very interesting bet


Warren Buffett is a big fan of passive investing. In fact at the end of 2007 he during the GFC he made a bet with a fund manager that he could invest in an index fund and it would outperform 5 hedge funds over the next 10 years.

The result? After 9 years the index fund had a compound annual return of 7.1% while the hedge funds were 2.2% per year. The biggest thing impacting the return on the hedge fund is the fees. You pay fees upwards of 1% PLUS a performance fee.

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