Share markets globally have adopted a series of ‘Leading Indices’ and ‘Sector Indices’. Constituents in the indices are based on characteristics such as market capitalisation and liquidity.

The indices provide:

• Benchmarks to compare the performance of the market both in the aggregate and by granular component to your portfolio,
• A snap shot of how the market is performing, and
• A base from which the momentum of the market can be assessed using technical analyses such as moving averages and relative strength indicators.

The indices are closely followed by fund managers as typically managed funds are promoted based on relative performance to indices targeted in the fund’s mandate. In particular this is the case with indexed managed funds.

Periodically constituents in the indices alter in response to changes in a company’s characteristics. Inclusion of a company typically creates buying pressure as fund managers re-balance fund portfolios. Similarly removal from an index typically creates selling pressure

The leading indices are constructed and calculated by Standard & Poor’s. Plain English explanations of the leading and sector indices are provided at the Australian Stock Exchange.

Leading indices comprise a constituency of companies primarily based on market capitalisation and liquidity without regard to the market sector within which they operate.

The leading indices can be useful when seeking to target companies with particular market capitalisation's such as large (XTL), mid (XMD) or small (XSO).

Sector indices comprise a constituency of companies primarily based on their business activities.

The sector indices can be useful when seeking to target companies with particular business activities such as energy (XEJ), financials (XFJ) or property trusts (XPJ).