Many stock market indices, like Australia’s All Ordinaries (XAO) and S&P/ASX 200, are expressed in points and not dollars ($).

For example, a reporter might say, “The All Ords fell 20 points today” or “The ASX 200 closed at 6,000 points”.

Why do they use “points”?

The reason most indices use points comes back to the way they are calculated.

For example, in simple terms, the ASX 200 is built using the market capitalisation of the ASX’s 200 largest companies (it has some other rules).

The All Ordinaries uses the top 500 companies and it has fewer adjustments than the ASX 200.

However, like the Dow Jones, both of Australia’s most popular indices are ‘adjusted’ for changes which the companies might undergo (e.g. spin-offs, stock splits, etc).

For example, if an Australian company is bought by a British company, it will no longer be included in the ASX — but the ASX 200’s ‘level’ should stay the same to be consistent — so it must be adjusted by a number that’s NOT a dollar value.

If a new company joins the ASX 200, the indices must ‘adjust’ for that change, too.

If S&P didn’t make these ‘adjustments’, the indices might jump up and down violently and not be representative of the entire stock market.

To adjust for these types of changes, the indices are adjusted using what’s called a ‘divisor’. It’s the tiny number that makes the index level smooth for changes in the company’s corporate structure.

Because the divisor is not in dollars ($), the index shouldn’t be in dollars either.

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