The S&P/ASX 200 index (also known as the XJO) is the main benchmark for the Australian equity market (replacing the venerable All Ords as the industry standard).

The index is made up of 200 of the top stocks, which boast a total value of around $1.1 billion (end of March 2010).

While there are around 2000 stocks listed on the ASX, these top 200 stocks make up almost 80% of the total value of the market.

The XJO provides investors and fund managers with a benchmark, a level of performance to compare their own Australian share trading to.

The index also forms the basis for futures contracts such as the Share Price Index (SPI).

Piece of the pie

The index is weighted by the float-adjusted market capitalisation of each stock, which means a 1% move in one of the bigger companies, moves the index more than a 1% move in a smaller company.

The finance sector makes up around a third of the index (by market cap, not number of companies), mostly through the big four banks.

Around 25% of the index is made up by mining stocks, and BHP, the market’s biggest stock, accounts for around 12-13% of the index just on its own.

Wild ride

Started up on 31 March, 200, the XJO began with a value of 3133, which was the value of the All Ordinaries at the time, and there has been plenty of action since then.

The XJO hit a low of 2693 in March 2003, just before the start of a bull market.

Over the next four and a half years, the XJO rose by over 150%, hitting a high of 6852 in November 2007.

This is when the global financial crisis (GFC) kicked in, sending the XJO spiraling lower over the next 18 months.

After hitting a GFC low of 3120 in March 2009, the XJO rose by around 50% over the next 12 months.

This party is invite only

To be eligible for inclusion in the ASX 200 index, a stock must meet market capitalisation, liquidity and listing criteria.

Market capitalisation is determined using a function of current index shares, the latest stock price and the investable weight factor (known as IWF).

IWF is negatively impacted by strategic holdings that are corporate, private or government in nature, meaning shares owned by founders, directors of the company and other companies are excluded.

The liquidity requirement for inclusion in the ASX 200 is that the trading volume (in dollar value terms) and the number of stock transactions must be higher than 0.025% of the total trading volume of all eligible securities.

Lastly – and this goes without saying – a company can only be listed on the ASX 200 if it is listed on the Australian Stock Exchange (ASX).

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Contract for Difference (CFDs) are becoming an increasingly common investment strategy for those wanting to make money from the Australian Stock Exchange. For people who are new to the market, however, they can be difficult to grasp at first glance.

Firstly, let’s get one thing straight in this lesson on CFD education: CFDS aren’t shares. In fact, CFDs have all the benefits of trading shares, without you actually having to physically buy, own or sell the shares.

CFDs are almost like a board game version of trading real shares in the market. They mirror the performance of a share, or an index. With CFDs, you make an agreement with a provider (like IG Markets or like CommSec) about the opening and closing price of a share or index you’re looking at. You are making a deal with the CFD provider to exchange the difference between the opening and closing prices of the share or index.

Say you see a company you think is going to crash. You can contact your CFD provider to specify the price of the company’s shares (the beginning of the contract) and what level you think the shares will fall to (the close of the contract). If and when you hit your target, the CFD provider will pay out cash on the difference between the starting share price, and when the contract is closed.

It doesn’t take a lot of CFD training in order to get your head around the CFD concept. You can advance your CFD knowledge by checking out the Australian Stock Reports CFD Report.

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Learning about the stock market isn’t difficult, with the mechanisms not being as complex as you might think.

A stock market is a public market for the trading of company stocks and derivatives at an agreed price. These are reflected as securities listed on a stock exchange as well as those only traded privately. Stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organisation, whose job it is to bring together the buyers and sellers.

Major countries have their own stock exchanges, and ours is the Australian Stock Exchange (ASX). The Aussie sharemarket doesn’t have a physical trading location, such as a trading floor. You instead buy and sell shares using a computerised trading system which links stockbroking firms
around the country.

Learning about and understanding the stock market can be an important tool for you to make money, as history suggests that Aussie shares have performed other types of investment over the long-term.  There are over 1500 companies on the ASX, covering most sectors of the economy, including financial services, industrials and healthcare.

If you decide to invest in the stock market, you can decide how much money you invest, into which companies and which sector, thus controlling your future. As you learn more about the stock market and understand how it works, you’ll be able to decide what shares you want to buy, and what shares you’ll want to sell or hold. When you buy or sell shares, your orders are entered into the computerised system at your stockbroking firm. The system finds a seller in the market that is willing to trade shares for the price you want to buy them. Your order is then placed in the order it is received, and voila! – you’ve made a footstep into the stock market.

Learning about and understanding the stock market is easy. For more information, you can visit our website, check out the education centre at the ASX website or speak to your broker if you open an account.

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