Trading the ASX 200 provides exposure to the most significant companies in Australia, with the index’s value depending on the performance of these companies. The ASX 200 is a list of the largest 200 companies that are publicly listed on the Australian Securities Exchange (ASX).
What is the ASX 200 (AU200)?
The ASX 200 is a leading stock index in the Australian financial market. The index is used as a proxy to examine the performance of companies listed on the Australian Securities Exchange. The companies listed on the index are determined by float-adjusted market capitalization.
This index has a wide coverage, as it constitutes over 80% of the Australian stock market. The ASX 200 index was created in April 2000, and its price is set in Australian dollars (AUD). The companies included in this index operate in different sectors, including healthcare, finance, energy, manufacturing and finance.
The ASX 200 index is also referred to as the S&P 200 index. The index fluctuates according to the performance of individual shares. However, the index tends to gain in the long run as it is regularly reconstituted. Companies performing well can be added to the index, while those with underwhelming performance are removed from the index.
The ASX 200 companies
The ASX 200 index is dominated by banks. Financial institutions comprise around 31% of the entire index. The other sectors included are materials, healthcare and consumer discretionary companies.
The majority of the companies listed on the index are based in Australia. However, it also consists of companies in other countries such as the United States, the United Kingdom and France.
As can be denoted from the composition of this index, the financial sector makes up nearly a third of the index. Therefore, this index might not be preferred by a trader looking for further diversification. The limitations of the stocks one is getting access to can prompt investments in foreign stock indexes or markets.
How is the ASX 200 calculated?
The ASX 200 is a weighted index of the market capitalization of the listed companies. This means that the companies with a larger market capitalization have a major influence on the index’s price.
Before a company is listed on this index, various factors are examined, including the type of securities being offered, the liquidity and the market capitalization. The other factor that plays a key role in selecting is that a stock must be listed on the Australian Securities Exchange.
The index does not remain constant. It is regularly rebalanced to reflect the current market capitalization of the companies listed on ASX. The index is rebalanced every quarter in March, June, September and December.
What are the benefits of ASX 200 trading?
There are many benefits realized by a trader investing in the ASX 200. These benefits include the following:
- Good for long-term investments – One of the primary benefits of investing in the ASX 200 index is that it is good for long-term investments. This index is rebalanced after every quarter. Therefore, while it may fluctuate occasionally, new best-performing companies are added to the index, which boosts its price.
- Grants exposure to the Australian financial market – This index is constituted of some of the leading companies in Australia. These companies operate in different areas, and as an investor, you get some form of diversification compared to investing in individual stocks.
- Less risky – Investing in the ASX 200 is less risky than investing in individual stocks. While the poor performance of one company can affect the index, the good performance of another company can aid the index in making price gains.
- Tax benefits – Trading in the XS 200 index comes with tax benefits compared to investing in individual shares and stocks.
- Good for new investors – This index also stands as a great option for a new investor looking for exposure to the Australian financial market. With just one index, an investor can gain exposure to key sectors in the Australian financial market.
What are the drawbacks of ASX 200 trading?
Before investing in this index, it is also important to analyze the drawbacks. These drawbacks will help you determine if the index is the right fit for your investment goals or not. The drawbacks of ASX 200 trading include:
- Dominated by the financial sector – Financial institutions comprise around a third of this index. This makes the index less suitable for an investor looking for a high level of diversification.
- Driven by large-cap companies – The index’s performance is also largely influenced by companies with large market capitalizations. If such companies record negative performance, the index’s performance is also affected.
What drives the ASX 200’s price?
Before you trade the ASX 200, it is recommended that you take note of the different factors that can affect the price of the index. This will help you determine the best time to enter or exit a trading position. The ASX 200 price is driven by the following factors:
The financial market’s performance is largely determined by the occurrences happening in the macro-environment. For instance, the outbreak of the coronavirus pandemic had a notable effect on the performance of companies globally.
In some cases, a company’s performance could be affected by the macroeconomic factors in the countries where its subsidiaries are located. Therefore, such companies could perform poorly despite the macroeconomic situation in Australia being favourable.
Macroeconomic factors can be favourable. For example, when lockdowns are lifted, it could lead to a better performance of ASX 200 companies. Keeping up with these factors can aid you in determining the best time to enter or exit a position.
News reports also tend to affect the performance of this index and the price of individual shares of the companies listed in the index. As an agile investor, it is important to keep up with the occurrences happening in Australia to help predict how the ASX 200 index will perform in the future.
The extent to which the index will rise or fall will depend on the nature of the news. Political situations tend to have a major effect on the index’s performance because they prompt investors to liquidate their positions.
News reports should not just be concentrated on the Australian macro-environment. It is important to keep up with news of the companies listed on the index. Any potential mergers, acquisitions, or partnerships can positively impact the performance of the index.
There are many ways that an investor can react to the news, with the most popular being to go long or go short. These positions allow you to benefit despite the effect that the news will have on the index’s performance.
Interest rate decisions
The other factor to consider is the interest rate decisions made by the Reserve Bank of Australia. The institution can raise or lower the interest rates depending on the economic situation. Changes to the interest rates usually cause fluctuations in the ASX 200 index.
The Reserve Bank of Australia usually changes the interest rates to control inflation or strengthen the economy’s performance. Interest rates usually affect the behaviour of investors, and they can either prompt more investments or trigger liquidations.
High-interest rates also cause a reduction in borrowing, affecting the companies’ earnings listed in the index. This causes the individual stock prices to fall, resulting in a decrease in the value of the ASX 200 index.
The strength of the Australian dollar will also affect the performance of the ASX 200 index. The companies listed on this index are usually multinational, and their earnings are largely affected by the exchange rates.
If the AUD is stronger than other currencies in the global market, the revenues of individual companies tend to be higher, causing a rise in the index’s price. In contrast, when the AUD is weak, it can result in negative revenue for companies listed within the index, causing a dip in its price.
The strength of the AUD can be determined by most of the factors listed above, including the macroeconomic situation in the country and news reports. Therefore, keeping up with these factors can enable a trader to predict the performance of the index and the strength of the AUD compared to other global currencies.
The earnings reports of the companies listed on the index can also influence the index’s performance. Earnings reports are usually published on a quarterly and annual basis.
When the earnings reports are published, and a company is performing better than expected, it can result in a gain in share value. If the earnings reports show poor performance, it can result in a decline in share value, causing a dip in the index price.
Since the ASX 200 is a market-capitalization-weighted index, the positive earnings reports of the companies with a larger market capitalization can trigger a notable gain in the index, while the poor performance of such companies can lead to massive dips in the index.
Price of commodities
The strength of the Australian dollar is pegged to the value of Australian exports. The value of commodities such as gold and copper will positively or negatively affect the value of the ASX 200.
If the value of these commodities increases when priced in AUD, it can result in the positive performance of companies listed on the ASX 200. The negative performance of the index will happen when the prices of commodities decrease.
How to trade ASX 200
There are many different ways that an investor can trade the ASX 200. The chosen trading method can be affected by a wide range of factors such as the trader’s experience level, risk appetite, or preference. To trade ASX 200, one can use the following methods:
ASX 200 via ETFs
One can trade the ASX 200 using exchange-traded funds (ETFs). ETFs are a form of derivative that allows a trader to diversify. ETFs usually comprise pooled securities traded as a combination of different investment types at set prices.
When a trader invests in an ASX 200 ETF, they buy shares in a fund that will track the performance of the ASX 200 index. With an ETF, you will gain exposure to the ASX 200 in a single transaction. Investing in income ETFs will also give you access to dividends.
ASX 200 via Futures
You can also invest in the ASX 200 using futures. Futures is a financial contract that will be bought or sold at a predetermined time and price. Futures are mainly used to hedge against risk because they allow an investor to make a profit even during dips.
Futures are merely used for speculative purposes, and therefore, you will not be holding any asset when you invest in futures. You can get access to ASX 200 futures through a brokerage platform.
ASX 200 via CFDs
One of the most popular ways to invest in the ASX 200 is contracts for difference (CFDs). When traders use this approach, they can gain profits even when the ownership of the asset is not transferred. CFDs also allow a trader to benefit despite the price fluctuations of the index.
Trading CFDs is usually preferred by traders with long-term goals because it allows a trader to avoid overnight funding charges even when the initial spread of wide.
Tips for ASX trading
When trading ASX 200, you can use the following tips to help you make informed trading decisions:
- Analyzed charts – The first tip to use is to analyze charts to give you an overview of the market sentiment. Price charts are readily available, and they give you access to the historical performance of this index to help you predict future performance.
- Select a trading style – As a trader, it is always recommended to enter the market using a trading style that best suits your needs. The different trading styles available include day trading, swing trading and scalping.
- Use trading signals – It is also advisable to integrate trading signals for the ASX 200. Trading signals will alert you when conditions for you to enter or exit a trade have been met. They allow you to make a trade at the right time.
- Keep up with the news – If you want to be a proactive trader, it is highly recommended that you keep up with the news surrounding the economy or those that would affect the performance of individual companies. News such as interest rate decisions and earnings reports can help you to make informed decisions
- Conduct technical analysis – Technical analysis is recommended for investments across all asset classes. Technical analysis involves using indicators to show patterns and trends. Price indicators are readily available on trading platforms.
ASX 200 trading hours
The normal trading hours for the ASX 200 is from 10:00 AM to 4:00 PM Sydney time from Monday to Friday. During this time, a trader can enter or close their trading positions. However, if you are trading derivatives, you can access the market at different times, depending on the brokerage platform that you are using to conduct your trades.
Why trade ASX 200 with PrimeXBT?
PrimeXBT is one of the leading brokerage platforms where you can trade ASX 200 and a wide range of other financial assets, indices and commodities. PrimeXBT gives you access to the following superior features:
- Security – When you trade ASX 200 at PrimeXBT, you can be assured that your funds will be safe following the high-security level integrated on the platform. PrimeXBT also upholds the privacy of user details.
- User-friendliness – Trading at PrimeXBT is convenient for both new and expert traders. The platform has a user-friendly interface that makes it easy to navigate as you make trades.
- Access to charts and patterns – PrimeXBT gives you access to charts and patterns that you can use for technical analysis. Analyzing charts and patterns is recommended for a trader who wants to make the right trading decisions.
- Easy to get started – Getting started on PrimeXBT is very easy. The registration process is smooth and fast. Moreover, the platform requires a low minimum deposit to get started.
- Access to a wide range of assets – PrimeXBT gives a trader access to a wide range of assets such as commodities, stock indices, forex and cryptocurrencies.
How do you trade in ASX 200 futures?
You can trade in ASX 200 futures through a brokerage platform. ASX 200 futures contract obligates you to trade the index at a predetermined time and price.
How does the ASX 200 work?
The ASX 200 comprises 200 of the largest companies in Australia. The index is capitalization-weighted, where a company's contribution to the index is determined by the total market value. The index is rebalanced each quarter.
Does the ASX 200 pay dividends?
It is possible to earn dividends if they are made when you invest directly in the ASX 200. You can also earn dividends when you use ETFs, where you commit the full value of the position before taking it, giving you direct ownership of the shares.
What is the difference between ASX 200 and ASX 300?
The ASX 300 index is larger than ASX 200. The ASX 300 index is comprised of all the ASX 200 companies plus 100 smaller-cap companies. ASX 300 is preferred by investors looking for further diversification.
What is the average dividend yield of the ASX 200?
The dividend yield received from the ASX 200 depends on the performance of the individual companies included in the index. The total return for this index in 2021 came in at 17%.