What is the ASX200 and how do you invest in it?
Here are the quickest and easiest ways to invest in Australia's benchmark stock index.
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On the news you often hear people talk about whether the ASX200 is up, down or flat. So, why is it such a big deal?
The companies on the ASX200 make up a big slice of the stock market and are some of Australia's most influential firms. So when there's a major event, we can expect to see the ASX200 rise or fall depending on how it impacts business.
For example, in March this year we saw the ASX200 drop by more than 30% in just a few weeks as the impact of COVID-19 became more apparent. Investors became nervous about how the pandemic would influence business profits and sold out of major stocks.
So for this reason, we use the performance of these indices as a measure of how confident investors are about the state of the economy.
Why would you invest in it?
When you invest in a stock market index like the ASX200, you're bargaining that the underlying economy is going to continue growing over time.
The idea is that although indices fluctuate year-on-year, they tend to rise in the long run. This is partly because indices themselves aren't fixed. If one company on the list goes under or shrinks, it's simply replaced by the next biggest company.
Although the ASX200 is down by around 11% from 12 months ago due to COVID-19, if we look over five years, it's actually grown by 15%. Expand to a period of four decades and it has risen by around 900%.
SPONSORED: ANZ, CBA, NAB and Westpac have scrapped or cut dividends as COVID-19 pressures hit profit margins.Read more…
How will this impact investors?
For these reasons, investing in a stock market index is often seen as a safer choice than investing in individual stocks and has become a popular choice among long-term investors.
How do you invest in it?
There are a few ways you can invest in the ASX200. Since it's simply a list of 200 companies, you could technically just buy stocks in each of these.
However, because the ASX has a minimum requirement of $500 per company, you'd need to invest at least $100,000 plus brokerage fees to get there.
It's far more cost-friendly to invest in an index fund. An index fund is like any regular investment fund except that it tracks specific indices. Instead of buying shares in multiple companies directly, you can invest in one fund that packages them altogether.
In Australia, these typically come as exchange traded funds (ETFs) – which are simply funds that can be traded over a stock exchange. To date, there are about half a dozen ASX200 ETFs to pick from and many more that loosely track the index with various subscribed methodologies.
To invest in an ETF, you'll need to sign up to a stock broker. You could either go with a full-service broker like Morgan Stanley, or you can use an online share trading platform for about a tenth of the price.
Once you've opened a share trading account (assuming you go this route), you'll need to transfer funds into your new account and search for your ETF of choice.
The next step is a matter of entering how much you'd like to invest (the $500 minimum still applies) or how many ETF units you'd like to buy.
Trading the ASX200
It's easy to get confused around trading and investing terms as the two can be fairly interchangeable.
However, when it comes to stock market indices it's an important distinction.
Investing in the ASX200 typically refers to an index fund, which is a relatively safe way to invest. But you can also trade stock market indices through leveraged CFDs which are much riskier.
When you trade CFD indices, you're betting on the price movements of the index. This means you have the potential to earn a profit whether the index is rising or falling.
This makes it a popular tool for traders. It's considered a high-risk product because both profits and losses are amplified through leverage.
With an index fund investment or even shares, you never lose more than you invested; however, this is not the case with CFDs.
To find out more about index funds, check out our comprehensive guide.
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