Trade Indices
An index Or Indices measures the collective price performance of a group of Shares, usually from a particular country. Indices are often used to track and compare the performance of stock markets.
The performance of each index is dictated by the performance of the underlying share prices that make up that index. An index is constructed and calculated independently, sometimes by a bank or by a specialist index provider like the FTSE Group. The choice of the companies included in the index is determined by index calculation rules or by a committee. Not all indices use the same rules, however.
Why Trade Indices?
First Time Trading Indices?
What is indices trading or stock index trading? Essentially you will be trading on what is called a “basket of stocks” or a combination of stocks. The great thing is that you don’t even have to own the stocks to be able to trade them. Some indices follow a certain category of stock – for example the Nasdaq is composed of non-financial companies – Apple, Amazon, Alphabet Class A (Google), Intel and more.
Why would you trade indices though compared to individual stocks?
The most obvious benefit is diversity and most financial advisors recommend this as a risk management strategy. Volatility is averaged out amongst the various companies, whereas if you are invested in just one, your entire investment is exposed to the volatility of just one company’s stock.
Another benefit, especially if you are investing in indices in different locations, is the ability to trade around the clock. This can be very helpful if you trade during certain hours, and another benefit is if something happens in one-time zone, it has the potential to effect the next market opening.
Another reason is stock markets are usually positively correlated to the health of an economy. If a country’s economy is up, so is its stock market – there are instruments though that move inversely to the health of an economy.
Safe haven currencies and precious metals usually move against the health of an economy, as investors flock to them to keep their assets safe during market volatility.
So how do you choose which index is best for you?
Although we can’t give investing advice , one thing holds true no matter what you trade: knowledge is power. Choosing an extremely popular index such the S&P500 or the Nikkei means you will have a deep well of information available to you, because not only will you have the primarily source reporting on the performance of the index but most other major financial publications report on them also.
Also many of the popular indices are generally composed of popular company stock, which are more likely to be regularly reported on.
Benchmark Indices
Sometimes you will hear journalists and analysts refer to a market’s benchmark index – this is the index most commonly used to track where a particular market is heading. A few of the main ones include:
- The Dow Jones (Wall Street) – the Dow Jones Industrial Average, the original stock market index, was created by Charles Dow in 1884. It follows the price of the 30 biggest companies on the New York Stock Exchange.
- Standard & Poor’s 500 (US SP 500) – this is the most widely tracked measure of the US stock market. It tracks the prices of the biggest 500 companies listed on the New York Stock Exchange and the NASDAQ.
- FTSE 100 (UK 100) – launched in 1984, the FTSE tracks the prices of the biggest companies by market capitalisation listed on the London Stock Exchange.
- Nikkei 225 (Japan 225) – this is the main stock market index for Japan, tracking the shares of 225 companies listed on the Tokyo Stock Exchange.
- Euro Stoxx 50 (EU Stocks 50) – this index was created to follow the prices of the biggest 50 shares in the Eurozone countries.
- DAX (Germany 30) – founded in 1988, the DAX follows the shares of the largest 30 companies listed on the Frankfurt Stock Exchange.
- CAC (France 40) – tracks the largest 40 companies listed on the Paris bourse.
- ASX (Australia 200) – the benchmark index for the Australian stock market is the ASX 200, which follows the prices of the 200 largest companies listed on the Australian Stock Exchange, ranked by market capitalisation.