Whether you've read about it in the finance section of the newspaper or heard it on the news -, have you ever wondered what they mean by "The Market"? In Australia when a news reader says the Market has gone up 2%, they mean that the All Ordinaries, sometimes shortened to All Ords, has gone up 2%.
So what is the All Ordinaries? The All Ordinaries is an index that tracks the overall movement of the top 500 biggest companies (measured by market capitisation) that is listed on the Australia Securities Exchange (ASX). Although there are over 2000 companies listed on the ASX, the market capitalisation of those included in the All Ordinaries accounts for over 95% of the value of all shares.
In March 2000, the S&P/ASX 200 was established to show the top 200 shares on the ASX. This is recognised as the 200 highest quality Australian share investment an investor can make. Unlike the All Ords, where the market capitalisation is the only requirement for entry, entry into the S&P/ASX 200 requires the stock be a sizable market capitisation, the stock must be liquid (tradable) and must be listed on the ASX.
Whether it's the All Ordinaries Index or the S&P/ASX 200, investors find indices useful because it's a quick way to judge the overall state of the market. Also, it’s directly linked to the economy - when the economy is strong you will find that the index will rise and vice versa. When the index rises sharply this is known a "bull" market (bull horns pushes the market upwards) and when the index drops sharply this is known as a "bear" market (bear claws the market down).
Indices are also useful because it can be used as a tool for comparison. For example, fund managers will usually compare their funds to an index. When a fund manager says their fund has risen 10%, we really don't know if that's a good result or if it's below par if we have nothing to compare it to. However if we can compare it to an index, say the S&P/ASX 200 then it's easier to judge. Let’s say the S&P/ASX 200 rose 6% during the same year, then we can say that the 10% result from the fund manager was a great result (because it’s greater than the movement of the top 200 shares on the ASX) but if it had rose 23% then a 10% return on the fund would be considered poor.
The biggest cited index in the world is the Dow Jones (DJIA), or just the Dow, from the USA. The Dow index is an average of 30 well-known companies such as Microsoft, McDonald's & Walmart. When the Dow was first published in 1896 it contained only 12 stocks. Over time, new stocks were added and some were dropped.
Other well known index from around the world is the FTSE 100 (UK), Hang Seng (HongKong), Nikkei (Japan), NASDAQ (US), S&P500 (US).