The S and P/ASX 200 Index: What Is It?

Feb 07, 2024 By Susan Kelly

The S&P/ASX 200 is a float-adjusted market capitalization-based index of the 200 most extensive ASX-listed stocks that are index-eligible. Eligible ASX-listed firms are used to compile the index's components. Companies must be listed on the Australian Securities Exchange (ASX) to be included, but primary or secondary listings are permitted. To be included, a stock must be a standard or preferred stock but not a hybrid stock (one that has specific fixed income characteristics).


The Importance of the S&P/ASX 200 Index


For prominent institutional asset managers, using float-adjusted market capitalization as a benchmark index makes sense because the index is tradable. It is challenging to trade stocks with low free floats (i.e., they are not included in benchmark indices based on their total market capitalization).


Only actively traded stocks may be included to maintain the index's liquidity. Because it is representative, liquid, and tradeable, the S&P/ASX 200 is considered the top Australian benchmark by index publisher S&P Dow Jones.


The index is rebalanced quarterly to ensure that the stocks included in the index match the eligibility criteria. With 200 equities had, the index is still heavily weighted in favor of the biggest names in the business.


As of June 2021, the index's most extensive ten stocks accounted for more than 46% of the total market value. Banks accounted for four of the ten stocks on this list, and the financial sector made up just over a third of the index.


Materials (resources) took second place, accounting for 20.6% of total revenue. The index's trailing P/E ratio was 65.72 at the end of June 2021, and its dividend yield was 2.8%.


Many ETFs and ETNs depending on the S&P/ASX 200 index are available for trading along with futures, options, and futures options contracts. The S&P/ASX 200 index provider publishes a monthly fact sheet with a list of items that can be invested. The 30-day investor sentiment of the Australian stock market is measured by the S&P/ASX 200 VIX index, which S&P Dow Jones also reports.


Calculations



To be included in the ASX 200, a company's market value is calculated by multiplying the number of tradeable shares, known as "capitalization weighting."


An additional feature of the ASX 200 is that its weighting is float-adjusted, which means that the index's numerical contributions are proportional to the stock's market value when it is free to trade.


Although the computation begins with a sum of the market capitalization of the constituent stocks, it is designed to reflect changes in share price and not market capitalization.


Since stock prices fluctuate more frequently than market capitalization, a " Divisor " adjustment is utilized to ensure that the index's value only shifts in response to those changes.


Because the ASX 200 index is based on market capitalization, any time a firm issues new shares, the Divisor is updated to reflect that.


Eligibility



For eligibility, the ASX 200 Index to include a company:


  • The float-adjusted market capitalization of a stock determines its weight in the index. Based on the most recent available stock price, the Investable weight factor, and current index share prices (IWF). The IWF represents the float-adjusted proportion of a company's equity capital. To put it another way, any strategic holdings classed as corporate, private, or government reduce the IWF and, consequently, market capitalization. Additionally, shares owned by the company's owners (including founders, CEOs, directors, trusts, venture capitalists, etc.) are not included. In addition to being long-term shareholders, these individuals are also known as strategic stockholders. The relevant float excludes any strategic shareholdings over 5% of the total issued shares.
  • To qualify as a liquid market, all qualifying securities' trading volume must exceed 0.025 percent of the total trading volume. If one corporation dominates trade, they are limited to 15% of the total value, volume, and transactions.
  • For inclusion in any of the S&P/ASX indexes, only equities that are traded on the Australian Stock Exchange will be eligible for inclusion.


How does the ASX Close Work?


This was before the Single Price Auction (CSPA), more often known as the "match," which occurs between 4:00 p.m. and 4:10 p.m. AEST. There is no actual trading during the "match phase" of the trading process.


There is a price ranking for both buyer's and sellers' orders. For buyers and sellers, the person who bids the highest or provides the lowest takes the lead. There is often an overlap in the middle, such as a buyer bidding $1.63 and a seller bidding $1.55 (for example). "Match" is the term for the place where they meet.


The ASX then generates a random close time between 4:10 and 4:12 p.m. AEST.


To determine the ending (or opening) share price, all "matching" share prices are weighted to get their mid-point. No matter how high or low investor bids or offers, all deals on the close (or open) take place at the same price.

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