What is an all-share index?

An all-share index measures the performance of a whole stock market. It includes the prices of almost all the stocks traded on that market.

You can think of an index as a big basket. The basket holds a little bit of every company in the stock market. Some companies are big, so they take up more room in the basket. Other companies are smaller, so they take up less room.

The all-share index tells us the total value of this basket. When stock prices increase, the basket’s value (the index) also increases. And when stock prices go down, the index falls.

How an all-share index works

The people who create an all-share index must decide which companies to include in the basket. They usually pick almost all the companies on a stock market, but they might leave out some tiny ones.

They must also decide how much each company should be included in the basket. They do this by examining its market capitalization (or “market cap”), the total value of all its shares.

So, a big company with a high market cap will make up a more significant part of the index basket, while a small company with a low market cap will make up a more minor part.

Once the basket is set up, it is given a starting value, like 1000 points. Then, as the prices of the stocks in the basket change each day, the value of the index changes, too.

Why all-share indexes are important

All-share indexes are essential because they give us a quick way to see how a whole stock market performs.

A measure of market health

The stock market is doing well if an all-share index increases over time. Companies and profits are growing, and investors feel good about the future.

But if the index is going down, it often means the market is struggling. Companies might be having a hard time, the economy could be weak, or investors might be worried about the future.

So, by looking at whether the all-share index is going up or down, we can get a sense of the overall health of the stock market and even the broader economy.

A benchmark for investors

Investors also use all-share indexes as a benchmark. A benchmark is something you use to measure your performance.

Let’s say you have money invested in a lot of different stocks. You can compare your returns (the profit you make) to the returns of the all-share index.

If your stocks do you beat the market better than the index, you’re doing a good job picking stocks. But if your stocks are doing worse than the index, you might need to make changes.

Many investors also put their money into index funds. These are special funds that automatically buy all the stocks in an index. So, if you invest in an all-share index fund, your returns will be very close to the returns of the actual index.

Limitations of all-share indexes

While all-share indexes are handy, they also have some limitations that are important to understand.

Not all stocks are included.

Even though an all-share index tries to include as many stocks as possible, it doesn’t always include every stock on the market.

Tiny companies or companies that don’t trade very often might be left out. So, the index might not capture the full breadth of the market.

Domination by large companies

Most prominent companies account for much of the total value in most all-share indexes, weighted by market cap.

So, if a few giant companies are doing well (or poorly), they can have a massive impact on the index, even if many smaller companies are doing the opposite.

This means the index might not always reflect what’s happening with the average company.

Short-term fluctuations

All-share indexes can be pretty jumpy from day to day. Even if the market’s long-term outlook is good, some bad news can send an index tumbling.

On the other hand, some good news can cause an index to surge, even if the economy still has underlying problems.

So, while indexes are great for getting a quick snapshot of the market, they can sometimes give a misleading picture in the short term. It’s always important to look at the longer-term trends, too.

Famous all-share indexes

There are all-share indexes for stock markets all around the world. Here are a few of the most well-known ones:

FTSE All-Share Index

This is the all-share index for the London Stock Exchange in the UK. It includes around 600 companies and covers about 98% of the UK stock market’s value.

The FTSE All-Share was started in 1962 and is maintained by FTSE Russell. It’s one of the world’s oldest and most widely followed all-share indexes.

Wilshire 5000 Total Market Index

The Wilshire 5000 is the main all-share index for the US stock market. Despite its name, it includes more than 6,000 stocks (almost all the stocks in the US).

It was started in 1974 by Wilshire Associates and is considered the best single measure of the total US stock market.

TOPIX

TOPIX (Tokyo Stock Price Index) is the all-share index for the Tokyo Stock Exchange in Japan. It includes around 2,000 stocks and covers almost the entire Japanese market.

TOPIX was first calculated in 1969. It’s the most widely quoted measure of the Japanese stock market’s performance.