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 created.

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

If it 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 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.

How Does Warren Buffett Identify Stocks To Buy?

Buffett Ebook

Download our free ASX and global investing guide, "How Warren Buffett Pick Stocks" when you join Rask Group's free Investor Club! Rask's Investor Club is designed to help you become a better investor by providing unique up-to-date insights on what's going on in the investing world.

Join Owen and Rask team today. Click here to join our club & download the ebook!

Was this post helpful?
Did this page help you or answer your question(s)?
Yes0
No0