The S&P/ASX 200 is the most widely watched and traded benchmark for the Australian stock market. The index is made up of 200 large-cap stocks listed on the Australian Securities Exchange (ASX), accounting for approximately 80% of the Australian stock market capitalization. The ASX 200 is a float-adjusted market capitalization index. It began trading in 2000, replacing the All Ordinaries index as the primary Australian stock market barometer.
How to trade the S&P/ASX 200
The ASX SPI 200 futures contract trades on the Australian Securities Exchange. The exchange code is “AP”. The notional contract value is determined by multiplying the current index value x A$25 (i.e. 10,000 x A$25 = 250,000). Futures can allow a trader to use a large amount of leverage, so understanding the leverage behind a position is important.
One of the drawbacks is the large margin requirements, which is why a smaller contract has been created. The smaller version of the ASX SPI 200 index is known as an ‘e-mini’ contract, available under the exchange code, “AM”. It has a multiplier of A$5, or 1/5 the size of the full-sized contract. (Notional contract value = A$5 x current price of the S&P/ASX 200). These are attractive due to the requirement for less margin and ability to adjust larger position sizes more precisely.
There are four main expiration months – March, June, September, and December.
Exchange Traded Fund (ETF)
The S&P/ASX 200 can also be traded via the iShares Core S&P/ASX 200 ETF under the ticker symbol – IOZ – which trades on the ASX. It is designed to mimic the price movements of the S&P/ASX 200 index. It is an effective way to trade the Australian index due to its low expense ratio, availability to investors of all size, and its deep liquidity.
Options are available for both futures and the ETF on the ASX. It is suggested that one familiarize themselves with how options work before trading them. This is one of the least capital intensive ways to trade the ASX 200, as options premiums are only a fraction of the cost of the underlying market. Traders can use options as a hedge or to speculate on the direction of the index, both up and down.
Contract for Difference (CFD)
This instrument was designed with the small trader or investor in mind. CFDs are constructed with futures contracts, but made into smaller contracts which require significantly less margin than futures contracts. Just like futures, these trade nearly 24-hours a day, 5-days a week. Most traders in the world outside of the United States have access to a broker who offers CFDs. These can be traded in both directions, long and short.
What impacts the ASX 200?
The Australian economy is significantly impacted by its reliance on exporting raw materials to China, thus making the Chinese economy an important driver to the index’s second largest sector, materials. The state of the financial segment of the economy is very important due to the size of the banks included in the ASX.
The S&P/ASX 200 is a broad-based index, but is still controlled by a few large stocks and sectors due to market capitalization. There are 49 stocks in the financial sector which account for over 40% of index weighting. Of that 40%, the top four components of the ASX 200 are financial stocks totaling approximately 24% of the entire index. The materials sector is second at over 14%, while industrials and healthcare account for about 8% each, and consumer staples and consumer discretionary stocks are about 6% each. The top 15 stocks account for approximately 50% of the total weighting. (data as of September 2016).
Changes in monetary policy by the Reserve Bank of Australia (i.e. interest rate adjustments) have an impact on investor sentiment and market performance similarly to how monetary policy stance affects other large global economies and stock markets.
Real-Time Indices Futures