How to invest in the S&P/ASX 200 Index
The S&P/ASX 200 Index offers a great opportunity to diversify your investment across 200 of Australia’s best-performing stocks. There are multiple ways to invest in the S&P/ASX 200 Index, so we’ll take you through the entire investing process, step by step.
What is the S&P/ASX 200 Index?
The S&P/ASX 200 is an index of 200 stocks traded on the Australian Securities Exchange. It includes the 200 largest stocks listed on the exchange, which account for about 80% of the exchange’s market capitalisation. The ASX 200 index tracks the stocks of companies from many different industries, including finance, industrials, technology, and healthcare.
Is it a good investment?
It absolutely can be, but whether it works for you is the most important question. The S&P/ASX 200 ticks several boxes, providing the benefit of diversification, an investment in many different blue-chip stocks, and a stake in a growing economy that’s one of the 15 largest in the world. The biggest risk for the ASX 200 applies to other market indices too: bear markets wreak havoc on stocks, so you’re much better off investing during a bull market and getting out at the right time if markets start heading in the wrong direction.
How do I invest in the S&P/ASX 200 Index?
Want to invest in the S&P/ASX 200 Index? If so, we recommend that you follow these three steps:
- Choose an investment type
- Use our top tips to succeed
- Choose a platform to invest with
1. Choose investment type
The investment type you choose should be properly aligned with your personal investment goals. You might choose one investment type based on low transaction fees, or another based on the quality of the investment advice that’s offered. Here’s a look at the different methods you can use to invest in the S&P/ASX 200 Index:
An ETF (which stands for exchange-traded fund) is an investment fund traded on a stock exchange, in a manner similar to the way you would trade an individual stock. Much like an individual stock, you can buy an ETF during regular stock market hours, something you can’t do with some other diversified investment types. ETFs include batches of assets such as commodities, bonds, or the batch of stocks you’ll find in the S&P/ASX 200 Index. ETFs are inexpensive to trade, which means they offer investors a great mix of flexibility and diversification.
One more unusual approach is to buy lots of individual stocks within the S&P/ASX 200 in separate trades, then gradually sell each stock to reduce your portfolio, until you’re left with a smaller group of top holdings. The drawback with this approach is that it will take you a long time to buy all 200 stocks that make up the S&P/ASX 200 Index, and you will rack up relatively large transaction fees when doing so.
A mutual fund is an investment fund run by a professional money manager, which you can buy either through a broker or the company that administers the ASX 200 fund. A mutual ASX 200 fund (also called an index fund) enables you to invest in all of the S&P/ASX 200 Index’s stocks at once, in the same way you would with an ASX 200 ETF. But ASX 200 funds differ from ETFs in two ways: you can only buy ASX 200 stocks at the end of the stock market’s trading day, and they cost more to trade and to own than ASX 200 ETFs do. With this in mind, mutual ASX 200 funds make most sense if you’re looking to buy ASX 200 stocks and hold, rather than trade, an investment.
2. Use our top tips to be a successful investor
To invest in the S&P/ASX 200 Index, it’s best to map out an investment plan ahead of time. Check out our top tips to become a successful investor:
- Do your research. Your research should start by studying how the S&P/ASX 200 Index has performed both recently and historically. After that, you can analyse how investing in the ASX 200 Index compares to other investments. Finally, figure out your goals, which will help you figure out if you want to buy and hold for the long term, or aim for quicker gains.
- Set a budget. Letting your losses pile up can damage your confidence and your ability to afford to make future trades. That means it’s important to figure out both your personal risk tolerance and the amount of money you can afford to lose. To manage your risk, set a stop-loss order after you make your investment, so that you limit the size of your potential loss if your investment doesn’t work out. The golden rule of investing is never to put in more money than you could afford to lose.
- Select the right platform. The investing platform you pick should align with your specific investment goals. If you care a lot about getting the lowest transaction fees, that’s a very different goal than demanding in-depth investment advice. It’s best to sort all of that out before you select the platform you want to use to invest in the S&P/ASX 200 Index.
- Grow your investments gradually. In the same way that a medical student doesn’t start practical training with a quadruple bypass, beginner investors should start slow by investing just a small amount of money at first. You can always get more aggressive with your investment approach as you get better and more experienced at investing.
- Think long-term. To score big gains when investing in S&P/ASX 200 Index, a buy-and-hold approach could be worth your while. If you’re going to try to buy and hold the index for a longer stretch of time, make sure to try it only during bull markets, as bear markets usually see indices tumble across the world.
3. Choose a platform to invest with
The most popular places to invest in the S&P/ASX 200 Index are detailed below:
- Brokers & ASX 200 trading platforms. Online brokers offer helpful tools that make investing both simple and inexpensive, making them attractive trading platforms to start trading ASX 200 for many different types of investors. Unfortunately most online stockbrokers don’t provide top-level investment advice. So if you’re looking for extensive investment guidance, consider a different investing method.
- Robo advisors. Robo advisors execute trades through algorithms, meaning there’s no need for human intervention at that stage of the investing process. Even better, some robo advisors will still also allow you to discuss your automated investment strategy with a human being so you can make sure you’re setting the parameters of the robot correctly. These platforms also tend to charge moderate transaction fees, keeping costs low (although not as low as with a broker). Robo advisors don’t tend to offer the same level of investment guidance that a top financial advisor does, though.
- Financial advisors. Financial advisors provide in-depth investment advice, reviewing your financial goals, explaining various investment options, and managing your investments over the long term to help you maximise profits. This comes at a cost, though: financial advisors charge more for their services than other investment methods. That extra cost can sometimes be worth it, but probably not when investing in the S&P/ASX 200 Index, since it’s a fairly simple process.
- Banks. Investing in the S&P/ASX 200 Index with your bank gives you the added convenience of keeping all of your financial ventures (such as your checking account, savings account, mortgage, and investments) with one institution. The problem is that banks tend to charge high fees, without providing the level of service that top financial advisors offer. What you’re paying for when investing through a bank is convenience, unless this is your most important concern, it’s probably better to look elsewhere.
Here’s a list of our top 3 recommended brokers to invest in indices ETFs:
What should I do now?
If you’re ready to invest in the S&P/ASX 200 index, simply log into you chosen platform’s website, select the specific type of investment you want to make, then click buy. Once you’ve invested, keep tabs on your investment. That way, you can make informed decisions about whether to hold or sell your investment, depending on the state of the market.
Try some of our investment courses for beginners
If you’re not feeling ready to invest yet, no problem. You can hone your investing skills by reading the easy-to-understand investing courses and informative news updates that we offer on this site.