What are indices and how do you trade them? Does this question always come to your mind when you want to start trading? If so, this article will describe everything you need to know to start trading stock market indices!
What Are Indices?
Indices measure the performance of a group of stocks. For example, the FTSE 100 tracks the 100 largest companies on the London Stock Exchange.
Trading indices allow you to gain exposure to an entire economy or sector at once while only opening one position. With Contract for Differences (CFDs), you can speculate on the price of indices rising or falling without owning underlying assets.
Indices are a highly liquid market to trade in. And because they trade for longer hours than most other markets, you can get more exposure to potential opportunities.
The Most Traded Indices Are As Below:
- DJIA (Wall Street) – measures the value of the 30 largest blue-chip stocks in the US
- DAX (Germany 40) – tracks the performance of the 40 largest companies listed on the Frankfurt Stock Exchange
- NASDAQ 100 (US Tech 100) – reports the market value of the 100 largest non-financial companies in the US
- FTSE 100 – measures the performance of 100 blue-chip companies listed on the London Stock Exchange
- S&P 500 (US 500) – tracks the value of 500 large cap companies in the US
This is not enough yet. Let us tell you how stock market indices are calculated.
Most of the value of an index is usually measured in points. Although each index’s calculation varies, it is often a weighted average of the stocks’ current values.
The market capitalization of the corporations that make up most stock market indices is used in their calculation. Larger cap firms receive more weight in this strategy. This indicates that their performance will have a higher impact on an index’s value than smaller cap companies.
The Dow Jones Industrial Average (DJIA), among other well-known indices, is price-weighted. According to this methodology, companies with higher share prices receive more weight. This means that changes in their values will have a bigger impact on the index’s current price.
Then, how to identify what moves an index’s price?
A variety of factors can influence the price of an index, including:
- Economic news: investor sentiment, central bank announcements, payroll reports…. These and other economic events can all have an impact on underlying volatility, causing an index’s price to move.
- Company financial results: individual company profits and losses will cause share prices to rise or fall. This can then affect the price of an index.
- Company announcements: changes in company leadership or potential mergers will almost certainly affect share prices. This can have a positive or negative impact on an index’s price.
- Changes to an index’s composition: when companies are added or removed, the prices of weighted indices can change. This happens as traders adjust their positions to account for the new composition.
- Commodity prices: commodity stocks make up 15% of the FTSE 100’s listed shares. Thus, changes in the commodity market could have an impact on the index’s price.
A Tip for Beginners
A wide market index is always a smart idea for new traders because trading only equities could be too dangerous.
Once you have a foundational understanding, picking individual stocks can be fun because they typically have better yields.