How is the All Ords index calculated?

[warakawa]

Hi, I would like to know how the all ords index are calculated by ASX. Any links would be highly appreciated.

thanks.

 

[pixel]

Re: how is ALL ORDS INDEX calculated?

Hi, I would like to know how the all ords index are calculated by ASX. Any links would be highly appreciated.

thanks.

All ASX indices are calculated by Standard & Poors, an American Ratings Agency. It's almost like judging in a Beauty Contest or Olympic Ice Skating: They rank all "ordinary" stocks by performance and size, thus establishing a ranking from place 1 to 500 or so. The ranks are then "normalised" to a "weight", which is in essence a percentage value. If S&P consider BHP "worth" 9% of the combined "power" of all top 500, then BHP gets the weight 0.09. The next company, say CBA, will get weighted at, say, 7%, etc down to the 500th on the list which may only get 0.001% - all numbers ficticious, just to explain the principle.
Every few seconds, the S&P computer will take the latest trade (price) of each of the top Aussie stocks, apply its normalised weight factor, add the whole string of numbers together, and arrive at the "All Ords" figure that is then broadcast (for a fee) to all brokers, traders, and news services.

The same is done for the top 20, 50, 100, 200, 300, as well as all the GICS sector indices you find listed at the ASX website on page http://www.asx.com.au/asx/statistics/indexInfo.do

 

[noie]

Re: how is ALL ORDS INDEX calculated?

I would include.. Rebalancing, which after the initial creation is the only major action that can happen to an index.

Rebalancing
Rebalancing of the S&P Australian index series occurs on a regular basis. Both market
capitalization and liquidity are assessed using the previous six months’ worth of data to
determine index eligibility. Shares and Investable Weight Factors (IWFs) updates are
also applied regularly.
Frequency
• The S&P/ASX 200 index constituents are rebalanced quarterly to ensure
adequate market capitalization and liquidity. Quarterly rebalancing changes take
effect on the third Friday of March, June, September and December

Methodology

 

[basilio]

Re: how is ALL ORDS INDEX calculated?

One interesting point to appreciate is that if companies failor start to fail they are taken out of the index and replaced with companies that are doing better.

Basically the losers are taken out and shot and fresh blood takes their place.

That tends to reduce any ongoinglosses the index might sustain when larger companies lose value. (of course if you were holding the shares that died you have lost your value forever)

This is one of the reasons investors should be cautious about advisors who point to a perpetually rising index as a reason for investing in the stock market. It ain't necessarily so.

 

[pixel]

Re: how is ALL ORDS INDEX calculated?

One interesting point to appreciate is that if companies failor start to fail they are taken out of the index and replaced with companies that are doing better.
[...]
This is one of the reasons investors should be cautious about advisors who point to a perpetually rising index as a reason for investing in the stock market. It ain't necessarily so.

Maybe "not necessarily", basilio; but an investor, who follows prudent capital management rules and weeds out underperformers from his/her portfolio, will most likely even anticipate the periodic rebalancing act of S&P's. After all, they will only remove the worst performers after they have proven to underperform.