What is the ASX 200 (AUS200) index and how to trade it?

The ASX 200 is a stock market index that contains the top 200 Australian shares listed on the Australian Securities Exchange (ASX).

The ASX 200 provides a great starting point for beginners who want to invest in stocks because it offers exposure to some of Australia's most successful businesses but also has enough diversity that long-term investors don't feel like they're too exposed to just one sector or industry.

In this article, we cover a complete overview of Australia's most popular stock index: the S&P/ASX 200 index. Widely seen as the leading benchmark for Australian investors, there are multiple ways traders can start index trading today to gain exposure to the ASX 200. Before we discuss how to trade indices like the ASX 200, let us have a look at what this index represents and the largest companies included in it.

What is the S&P/ASX 200 index?

The S&P/ASX 200 is the leading stock index in the Australian market and is often used as a benchmark against which the performance of individual shares or funds is compared to. The index is designed to track the performance of the 200 largest eligible stocks listed on the Australian stock exchange measured by their float-adjusted market capitalization.

The index covers more than 80% of the entire Australian stock market by size. The S&P/ASX 200 was launched in April 2000 and is priced in AUD (Australian Dollars).

How is the ASX 200 calculated and how are ASX 200 companies selected?

The ASX 200 is a float-adjusted market cap-weighted index, meaning that the share a company holds in the index is connected to its total market value.

For a stock to be eligible to be an index constituent, it needs to meet several eligibility criteria:

1. Listing: The stock must be listed on the ASX.
2. Types of securities: Common and equity preferred stocks are eligible, but hybrid products such as convertible stocks, bonds, and warrants are not.
3. Market capitalisation: To be part of the ASX 200 index, the stock must be institutionally investable and the market cap plays a key role in the selection of the stock.
4. Liquidity: The stock must be frequently traded, with the liquidity measured relative to its peers.

The ASX 200 index is frequently rebalanced to ensure proper market capitalisation and liquidity. Quarterly rebalancing occurs in March, June, September, and December.

What are the ASX 200 trading hours?

The cash equity market is open from 10:00 AM to 4:00 PM (Sydney time).

The SPI 200 Index Futures and Options can be traded from 5:10 PM to 08:00 AM and again from 09:50 AM to 04:30 PM for the period from the second Sunday in March to the first Sunday in November; and from 05:10 PM to 07:00 AM and again from 09:50 AM to 04:30 PM for the period from second Sunday in March to first Sunday in November.

What sectors are in the ASX 200?

As the information below shows, the ASX 200 is heavily dominated by banks. The financial sector makes up 31% of the overall index, followed by Materials, Healthcare, and Consumer Discretionary companies. 186 out of 200 companies are based in Australia, while 8 are based in New Zealand, 4 in the United States, and 1 each in the United Kingdom and France.

Source: S&P Global

What are the top 10 companies in the ASX 200?

5 out of the 10 largest companies in the ASX 200 share market index are banks. As we have seen in the sector breakdown above, the index is also heavily dominated by the financial sector, which makes up almost a third of the index.

While the ASX 200 is a good way to diversify compared to buying only a few individual shares, traders should still be aware of the limitations and that further diversification might be needed (such as investing in foreign stock markets and/or fixed-income securities).

Source: S&P Global

ASX 200 share price

Since its launch date, the ASX 200 index had several downturns with the two notable ones being the 2007-2009 crash (during the Great Financial Crisis) and the more recent March 2020 decline that was caused by the coronavirus pandemic. The index recovered quickly from the COVID setback and followed its American/European peers to new record highs.

How to trade ASX 200?

Contract for Difference (CFDs) is one of the ways traders can trade the ASX 200 cost-effectively and efficiently. Generally, brokers offer a CFD based on the Cash Index (AUS 200) and a CFD based on the underlying Futures contract (SPI 200).

When trading the index using CFDs, traders can speculate on the direction of the underlying instrument (the ASX 200) without owning it or any of its constituents. Traders can make use of leverage and will have the ability to go both long and short.

This can prove especially useful during a downturn. Most traders want to avoid a reshuffling of their portfolio as the costs can quickly add up and it is incredibly difficult to time the market correctly. Therefore, instead of selling a large part of the portfolio when traders anticipate a correction, CFDs could be used to speculate on falling prices.

Whether the Cash CFD (AUS 200) or Futures CFD (SPI 200) will be more suitable, will primarily depend on the trading style. If traders hold positions for a short period of time, the AUS 200 might be preferred as it has low spreads. On the other hand, a long-term trader might prefer the SPI 200 as there are no swap charges.

In sum, Cash CFDs have lower spreads and are more suitable for short-term traders, while Futures CFDs are popular amongst position traders as no daily swap fees are charged. Traders should note that Futures CFDs are subject to a rollover. A rollover is when a trader moves their position from the front-month contract (close to the expiration date) to another contract date in the future, to avoid the costs or obligations associated with the settlement of the contracts. Contract rollovers are profit neutral.

How to invest in ASX 200?

Exchange Traded Funds (ETFs) are the easiest way to invest in the ASX 200 index. It is more cost-effective than buying the individual shares and the rebalancing is done quarterly.

While ETFs can be leveraged too, traders will usually have less flexibility than trading CFDs. However, if a long-term trader doesn't want to actively trade the product, ETFs might be an efficient solution.

There is a variety of ETFs available from different providers. When choosing an ETF, traders should go through the factsheet that is provided by the broker so as to be familiar with the specifications of the product and the charges involved.

What moves the ASX 200?

The index will move up and down as investors trade the constituent shares. Large price movements in shares that have a higher weighting in the index will cause larger fluctuations in the value of the index.

On the other hand, companies with a smaller market cap will not have a significant impact on the price movement of the index.

The main factors causing the ASX 200 price to move are:

• Economic data: Australian economic data will affect the domestic stock market. Depending on the nature of the data, some companies will be more affected, while others will be less or not affected at all. For example, rising interest rates would most likely affect the share price of banks.
• Earnings: Quarterly and annual results, forecasts or company news can all affect the share price of a company, and therefore the value of the ASX 200. As the index is dominated by a small group of companies and two sectors in particular (Financials and Materials), it is worth paying additional attention to their results. 
• Currency fluctuations: Larger movements in the value of the Australian Dollar can affect the price of the ASX 200. A strong AUD could make life more difficult for exporters, dragging their share prices lower.
• Commodity prices: Australia is a major commodities exporter, and those companies will be particularly affected by the movements in the global commodities market. A surge in commodity prices will boost the share price of mining companies, while a downtrend in the commodity market will generally depress the share price of those companies.

What is the average return on ASX 200?

According to S&P Dow Jones Indices, the S&P/ASX 200 had an average total return of 9.3 percent each year over a 10-year period.

What does the performance of the S&P/ASX 200 show us?

The ASX 200 certainly had its ups and downs, but overall, the average return makes the index far more attractive than bonds or holding cash in the bank. It all comes down to personal risk appetite.

For example, risk-averse investors might not be comfortable with the fluctuations in the stock market. However, one tactic that can help is dollar-cost averaging (DCA). This is an investment style in which investors divide the total amount to be invested over a certain period of time. For example, instead of investing A$100,000 in the stock market today, you may spread this out over 12 months (which would mean investing A$8333 per month). While DCA could potentially lead to lower returns over the long term, some investors who feel nervous about investing a large lump sum still prefer it.

Regardless of that, the ASX 200 is an excellent tool for tracking the overall performance of the Australian stock market as the index accounts for more than 80 percent of Australia's stock market capitalisation and is frequently rebalanced.

List of ASX 200 companies

Looking to learn more about other indices:

• DAX 40
• FTSE 100
• NASDAQ 100

Ready to trade your edge?

Join thousands of traders and trade CFDs on forex, shares, indices, commodities, and cryptocurrencies!

This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation, or needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability regarding the accuracy and completeness of the content in this publication. Readers should seek their own advice.