An index is a means of representing the change in value of a basket of underlying securities in a particular market or sector of a market. Indices can be based on the market capitalisation of companies or can be based on certain market sectors where all the participating companies are engaged in the same general type of business.

The state of the Australian stock market is usually judged by the S&P/ASX 200 Composite Index, which recently replaced the All Ordinaries Index, normally known as the All Ords.

The S&P/ASX 200 Composite Index is a measure of 200 of the largest and most frequently traded stocks on the Australian share market. Measuring their rise and fall allows us to have a fairly accurate reading of how the Australian market as a whole is faring.

The American equivalent of the S&P/ASX 200 Composite Index is the Dow Jones Index. Each major share market around the world has its own index to help investors rate how the market is faring, plus a number of sub indices such as the industrial index, a gold index or a resources index, that measure particular sectors.

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Definite forces shape share prices. An understanding of these forces can do more than help you formulate an investment strategy - it will also help you see how events can shape everything from the unemployment rate to interest rates. The following are a few of the factors that affect the price of a share:

• Supply and demand
• A company's financial health
• The industry's financial health
• Economic trends

In addition to these fundamentals the behaviour of market participants drives the prices of shares. This behaviour often manifests itself as "greed and fear"

You can learn how to avoid these two behaviours and make money out of trading shares in all market conditions. Click here to read about real Hometrader clients who have done just that.

GICS Classification System

Standard & Poors assumed ownership of the Australian index business in 2000 and created the current index series that are internationally accepted as one of the world's most transparent benchmarks.

The GICS classification system was established to provide a consistent set of global sector and industry definitions. The structure is comprised of 10 sectors, 24 industry groups, 67 industries, and 147 sub-industries.

S&P currently publishes 90 indices for the Australian market. Some these indices are published in real time whilst the remaining are published on an end of day basis. The real time indices are:

The S&P/ASX 200 and S&P/ASX 50 indices are the main international benchmarks for the Australian equity market. The S&P/ASX200 covers approximately 80% of the market capitalisation of the whole market, whilst the S&P/ASX50 represents around 65% of the Australian market capitalisation.

These indices allow you to trade a view on the broad market or on a sector of the market in a single transaction rather than constructing a portfolio of shares that make up an index. It is also a very efficient hedging tool to protect the value of an existing portfolio of shares that you do not wish to sell at this current time.

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