When you hear about ‘the share market’ on the news or when scrolling on your phone, it’s likely you will actually be hearing about the movements of the S&P/ASX 200 Index (ASX: XJO).
See, the share market is made up of over 2,000 different companies, all being bought and sold in one marketplace. As such, it’s very difficult to ascertain what the ‘entire market’ is doing by just looking at these thousands of different company names.
How the ASX 200 really works
That’s why the concept of an index is so useful. An index like the ASX 200 is really a collection of a select group of shares, usually those with the highest market capitalisation (or value).
The thinking goes that if we look at how the biggest companies are fairing, we’ll get a good idea of how the market is trading as a whole.
The ASX 200 index does just this by selecting the largest 200 public companies trading on the ASX.
But most indexes, including the ASX 200, don’t treat each company equally but rather adopt a system known as ‘weighting’. Weighting involves giving the larger companies a higher ‘weight’ or value within the index. By doing this, the movements of the largest shares are going to influence the overall index much more than the movements of the smaller companies.
So if we look at the index today, we can see how the largest companies come to dominate. Here’s a table of the top 10 shares within the ASX 200, and how much weight each share has.
All-stars of the ASX
| ASX 200 share name | Index weighting (%) |
| CSL Limited (ASX: CSL) | 8.12 |
| Commonwealth Bank of Australia (ASX: CBA) | 7.09 |
| BHP Group Ltd (ASX: BHP) | 6.57 |
| Westpac Banking Corp (ASX: WBC) | 3.72 |
| National Australia Bank Ltd. (ASX: NAB) | 3.60 |
| Australia and New Zealand Banking Group Limited (ASX: ANZ) | 3.29 |
| Woolworths Group Ltd (ASX: WOW) | 2.94 |
| Wesfarmers Ltd (ASX: WES) | 2.94 |
| Telstra Corporation Ltd (ASX: TLS) | 2.41 |
| Transurban Group (ASX: TCL) | 2.40 |
Table: Author’s own
As you can see, it’s really only the largest few ASX 200 companies that have significantly different weightings to the others in the top 10. As you move further and further down the table, each company’s individual ability to influence the overall index diminishes.
A massive 43% of the power to affect the overall movement of the ASX 200 index resides with these top 10 companies. Therefore, when you hear about the index rising or falling on any one day, it’s usually because a combination of the shares you see above are doing so.
So when you next hear about what the ASX 200 index or ‘ASX shares’ are doing, you’ll know that it’s the movements of the above companies that are really being discussed most of the time.
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Sebastian Bowen owns shares of National Australia Bank Limited and Telstra Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of Transurban Group, Wesfarmers Limited, and Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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