How do sharemarket indices work?
Sharemarket indices trace the change in total market value of a specific basket of publicly listed stocks.
They are known as capitalisation weighted indices, because they represent the sum of the market capitalisations of the companies making up that index. A company’s market capitalisation is calculated by multiplying its share price with the number of shares on issue.
Changes in the value of an index reflect changes in the market capitalisation of its constituents as the share price of each changes.
The index weight assigned to each company is proportional to that company’s capitalisation. In other words, larger companies are assigned a greater index weighting than smaller ones.
Market indices provide insight into the performance of an asset class, or a segment of that asset class, and are used to benchmark the performance of portfolios that invest in a specific asset class, such as exchange traded funds or managed funds.
Australia’s primary indices are:
|All Ordinaries Index||The main Australian share price index – it traces the change in the total market value of Australia’s 500 largest ASX-listed companies|
|S&P/ASX50 Index||Comprises the 50 largest ASX-listed stocks by market capitalisation|
|S&P/ASX100 Index||Comprises the 100 largest ASX-listed stocks by market capitalisation|
|S&P/ASX200 Index||Comprises the 200 largest ASX-listed stocks by market capitalisation|
|Small Ordinaries Index||Comprised of companies included in the S&P/ASX300 index, excluding those in the S&P/ASX100 index; often used as a benchmark for small cap investments|
|S&P/ASX Emerging Companies Index||Comprised of companies ranked outside the S&P/ASX 300 by market capitalisation|
|S&P/ASX MidCap 50 Index||Comprised of those companies in the S&P/ASX100, excluding the top 50 companies by market capitalisation.|
For each of these share price indices, there is a corresponding accumulation index.
There are also a range of sector specific indices.
Share price index vs accumulation index
A share price index measures only price change.
An accumulation index measures price change and is adjusted to account for dividends paid by companies in the index.