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Sharemarket Index

Discussion in 'Investing Glossary' started by Glossary, 28th Sep, 2006.

  1. Glossary

    Glossary Active Member

    12th Sep, 2006
    An index is basically a way to measure the change or movement in the whole of the equity market or a particular segment of it, i.e. it's a performance yardstick. In Australia, the local branch of international ratings agency Standard & Poor's (under an alliance arrangement with the Australian Stock Exchange) calculates the common indices which are used.

    The way an index works is that it is comprised of a representative sample of the stocks which are statistically determined to represent the changes in the underlying whole market or market segment. Quoting the behaviour of an index is really a shorthand way of referring to the overall performance of the underlying basket of stocks.

    The main indices for the Australian market are:
    • the All Ordinaries Index, which measures the overall market performance;
    • the S&P/ASX 100, the top hundred stocks by market capitalisation and liquidity;
    • the S&P/ASX 200, which is now the main benchmark used by fund managers against which to rate their performance. As you'd anticipate, it is comprised of the top 200 Australian listed stocks by market capitalisation and liquidity. It represents around 78% of the total market cap of the market;
    • the S&P/ASX 300, like the 200 but with the next hundred stocks by market cap and liquidity thrown into the mix. Interestingly, adding an extra 100 stocks only adds around another 1% coverage of the market over the S&P/ASX 200;
    • the S&P/ASX MidCap 50, which is the bottom half of the S&P/ASX 100; and
    • the S&P/ASX Small Ordinaries, which is the bottom 200 out of the S&P/ASX 300 index. This is generally regarded as the benchmark for small cap investors. It represents around 6% of the total Australian market capitalisation.
    There are other indices produced by S&P and also international indices produced by S&P and others, such as the Morgan Stanley Capital International's MSCI Global Capital Markets Index and the Dow Jones Industrial Average. In addition, as mentioned above, there are indices which refer to just a particular segment of the broader market. For example, S&P produce healthcare, utilities, financials and information technology indices to name just a few. These sector specific indices are based on the Global Industry Classification Standard (GICS) which has been reached by consensus between S&P and MSCI. The use of GICS is really quite important in comparative market analysis as it ensures analysts are comparing "apples with apples".

    Note also that indices such as the S&P/ASX 200 can be quoted as both a price index and an accumulation index. A price index measures only capital gains and losses and ignores dividends or distributions received, whereas an accumulation index provides a total return by including such income paid to the stockholder. It follows that the accumulation index will typically be higher than the price index.

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