Can someone in the know please explain to me what one 'point' in the All Ordinaries and/or ASX 200 is? E.g. when an index drops by 100 points, what do those points actually represent?
Thanks in advance
Thanks in advance
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Business & Finance All Ords/ASX 200
- Thread starter Patrick Bullet
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- #2
The "up 100 points" is made up from the change in the ASX200 companies share prices. For example if a majority of companies in the index have shareprice increases the index will be in the positive. Not sure the exact way they determine the amount of points though.
ASX or Standard & Poors would be the best sources for a complete definitive answer, but I'll give you my general understanding.
I have built my own indexes from stock prices and here's what I do
- Define the group of stocks you wish to index. Market capital and sector and the most common criteria for groupings. The ASX 200 represents the top 200 companies by market cap, with some other qualifying conditions which try to ensure only stable companies are included.
- Pick a large positive number, 1000 say.
- For a given day you get the net percent movement for the group of stocks which are the constituents of your index.
Say there's only 4 stocks.
BHP +0.5 %
RIO +1.2 %
NCM -1.0 %
ABC +0.3 %
Net % movement = (0.5 + 1.2 -1.0 + 0.3) / 4 = 0.25 %
(the / no_of_constituents is needed as we want to normalize for that variable. If we did not do that then on a bullish day if 200 members were mostly positive our net movement would end up being a lot bigger than for say a 50 member index. We want our index movements to be independent of constituent count.)
- Our index is currently 1000 and we want it to reflect a 0.25 % increase.
1000 + (0.25 / 100) * 1000 = 1002.5, this is the new index value
e.g.
Monday 1000
Tuesday 1002.5
Doing it like this our increments are always in proportion to it's current size. I don't want to add 2.5 when the index is 10000 I want to add 25.
But, then you have weighting to consider. A weighted index gives more credence to stocks which have large market caps. So above those stock movements are scaled first by a factor which is derived from that stocks cap as a ratio to the total cap of all constituents. Weighting doesn't have to be all or nothing you can have a partial weighting.
I have done my own weighting but I imagine there are various approaches which would all be generalisations of the above.
I have built my own indexes from stock prices and here's what I do
- Define the group of stocks you wish to index. Market capital and sector and the most common criteria for groupings. The ASX 200 represents the top 200 companies by market cap, with some other qualifying conditions which try to ensure only stable companies are included.
- Pick a large positive number, 1000 say.
- For a given day you get the net percent movement for the group of stocks which are the constituents of your index.
Say there's only 4 stocks.
BHP +0.5 %
RIO +1.2 %
NCM -1.0 %
ABC +0.3 %
Net % movement = (0.5 + 1.2 -1.0 + 0.3) / 4 = 0.25 %
(the / no_of_constituents is needed as we want to normalize for that variable. If we did not do that then on a bullish day if 200 members were mostly positive our net movement would end up being a lot bigger than for say a 50 member index. We want our index movements to be independent of constituent count.)
- Our index is currently 1000 and we want it to reflect a 0.25 % increase.
1000 + (0.25 / 100) * 1000 = 1002.5, this is the new index value
e.g.
Monday 1000
Tuesday 1002.5
Doing it like this our increments are always in proportion to it's current size. I don't want to add 2.5 when the index is 10000 I want to add 25.
But, then you have weighting to consider. A weighted index gives more credence to stocks which have large market caps. So above those stock movements are scaled first by a factor which is derived from that stocks cap as a ratio to the total cap of all constituents. Weighting doesn't have to be all or nothing you can have a partial weighting.
I have done my own weighting but I imagine there are various approaches which would all be generalisations of the above.
- Thread starter
- #4
Thanks HT! A wee bit complicated for me, but it makes perfect sense!
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Well the basic answer is that the units in the index reflect nothing other than the average percent movement of the constituents over which it covers.
