Indices trading is popular among traders, allowing them to make a profit from the price movements of indices. To understand what indices trading is all about, it’s essential to start with answering an all-important question.
What is an index?
In trading, an index is a measure of the collective movement of a group of financial assets. These financial assets provide a performance indicator for a particular sector. Indices is the plural form of an index.
Several asset classes have indices but the most common are stock indices and commodity indices. Indices are only indicators and so they have no physical value. Consequently, they are measured in points rather than in currency.
Indices traders cannot invest in and trade any index directly like they would with a commodity or stock. They trade through various products like index futures, ETFs, and CFDs. These products allow them to speculate on the movements of various indices without having to buy every single asset within.
When it comes to determining value, each index has its own calculation method. However, in most cases, the relative change of an index is more important than the actual numeric value representing the index.
For instance, if the NASDAQ 100 INDEX (NAS100) is valued at 8,566.67, this number represents a change from an original base value. It tells traders that the index is over 8.5x it’s base level of 1,000. This number is informative but it’s more important for traders to know the amount by which the index has increased or fallen and this is often expressed as a percentage.
How do indices move?
Several factors affect indices price movements and volatility. Some common ones include:
Major political events
Economic data at a particular time e.g. employment figures in a particular region
Major changes in the currencies markets
Events that affect companies in a particular sector. A substantial change in the value of one big company that’s part of a bigger index can disproportionately affect the value and performance of that index.
The common indices
“Benchmark indices” dominate the global indices markets. These are indices that essentially have a big impact on economies and are generally viewed as reliable indicators of the economic health of a particular area or country. The well-known indices are often ranked by independent organisations including major banks and specialist institutions like Standard & Poor’s (S&P).
The following are some of the biggest indices markets in the world:
Popular American indices
Dow Jones (DJ 30) – comprising 30 of the biggest publicly owned companies in the US, it’s often referred to as “Wall Street.”
NASDAQ 100 – a capitalisation weighted index comprising over 100 tech companies in the US.
SP500 – a stock market index for 500 large companies listed on several US stock exchanges.
Popular European indices
The FTSE 100 – representing the UK’S 100 biggest companies by capitalisation, the index is sometimes called the “UK 100.”
The DAX – popularly referred to as the “Germany 30,” this index comprises 30 major German companies.
CAC 40 – this index comprises 40 of France’s biggest companies by capitalisation and it’s simply referred to as the “France 40.”
Popular Asian indices
Nikkei 225 – a price-weighted index comprising 225 of Japan’s biggest companies.
HSI 50 – an index comprising 50 of the largest companies in China by market capitalisation
Why trade indices?
Indices trading gives the trader several benefits.
Indices expose a trader to companies across several sectors and industries, allowing for easy and effective diversification.
Traders don’t have to conduct thorough research on each individual company, they only need to take a bullish or bearish position on the index depending on overall market sentiment.
The price movement of indices is relatively smoother – having a group of financial assets minimises extreme price spikes. This naturally makes indices trading less volatile than other instruments but with enough volatility for traders to make profits.
With indices, the trader never owns the asset therefore costs are far lower.
Is trading indices for you?
Indices trading allows you to trade price movements in major indices from all over the world. You’ll also benefit from the potentially lower risk of exposure to extreme volatility and the bigger opportunities provided by the wider variety of companies. But as always, a strategy and careful risk management is required.
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