Indices are one of the most popular trading instruments. They allow investors to get market exposure to the entire industry or even economy, without having to trade company stock directly. Moreover, indices trading provides speculators with a potential opportunity on both rising and falling markets since they can open either long or short positions. If you are considering adding this asset to your investment portfolio, but are confused about where to start from, read our article and find out what is special about trading indices, which indices are the most popular, how to trade them, and more.
A stock index is a measurement that helps traders evaluate the performance of a specific basket of stocks over some time. What’s more, it can serve as a benchmark of the economical situation in a particular region or country. For example, S&P 500 index provides performance information about more than 500 US companies, allowing investors to gauge the condition of the whole US stock market while having only one position opened. This way, if the average value of these 500 companies increases the index will go up, and conversely, if the average value of these companies decreases, the index will go down as well.
Based on their coverage, indices can be divided into seven categories:
There are two common ways to calculate stock indices: market capitalization-weighted and price-weighted.
The history of indices trading dates back to 1884 when the Dow Jones Transportation Average Index (DJTA) was created. It is the oldest of still-existing stock indices. Don’t confuse it with the Dow Jones Industrial Average (DJIA) often called Dow Jones, or the Dow calculated by Charles Dow and Edward Jones in 1896, which makes it the second-old stock index worldwide. Initially, the Dow was focused on the heavy industry field. However, in the course of history, it was changing and evolving. Nowadays the Dow consists of 30 blue-chip companies from all the major industries, except transportation and utilities.
In 1923 a Standard Statistic Company, which later merged with Poor’s Publishing, created its first market index. It consisted of 233 companies. In 1957 this number was increased to 500, forming one of the most popular indices nowadays - the S&P 500. Both the Dow Jones and S&P 500 remain popular and widely used. However, many financiers consider the latter one more informative and accurate since it is market-value-weighted and has a bigger number of component companies.
The financial market offers investors a great variety of indices to trade. Only the US stock market comprises over 5000 of them. Some of the world’s major indices include NASDAQ-100, Dow Jones Industrial Average (DJIA), S&P 500, FTSE 100, the DAX-30, IBEX 35, etc. Let’s have a closer look at them.
NASDAQ-100 is a market-capitalization-weighted index. It represents the 100 largest US and international companies, coming from different fields except for the financial one and listed on the NASDAQ stock exchange. Some of them include Apple, Google, Microsoft, Facebook, and others. 56% of this index is formed by technologically-focused companies, the second-largest share is represented by consumer service companies such as eBay, Booking Holdings Inc., and others. NASDAQ-100 is traded via the Invesco QQQ exchange-traded fund, which monitors the performance of index constituent companies.
The Dow is the second oldest index worldwide created in 1896. It represents the performance of 30 blue-chip publicly-owned US companies traded on the New York and NASDAQ stock exchanges. In contrast to other heavily-traded indices, it is weighted on the stock price of its component companies. This is one of the reasons why DJIA is often considered inadequate in comparison with other broader indices. The Dow is supervised by the Averages Committee, which selects the index constituent companies from different sectors except for the transportation and utilities. Some of the most popular names involve Coca-Cola, Disney, Nike, IBM, and others.
Standard & Poor's 500 is a market-cap-weighted index that tracks 500 top publicly-traded US companies and captures about 80% of the available market capitalization. Being one of the broadest indices, it’s considered one of the most accurate and adequate tools to analyze the condition of the US stock market. Some of the index components include Apple, Amazon, Tesla, Pfizer, PepsiCo, and others. S&P 500 is supervised by the US Index Committee, which decides on the choice of component companies and manages the methodology.
Financial Times Stock Exchange 100 represents the performance of the 100 companies traded on the London Stock Exchange based on their market capitalization. Some of the examples include AstraZeneca, HSBC, Shell, Tesco, etc. Many of FTSE 100 constituents are international. This means that despite being considered the UK major index, it is not a UK stock market benchmark.
DAX is a market-capitalization-weighted index that includes the 40 largest german companies represented on the Frankfurt Stock Exchange. It can be compared to the US Dow Jones index and due to its rather small representation can not be always considered as an accurate German stock market benchmark. Some of its well-known constituent stocks include Adidas, BMW, Continental, Siemens, and others.
This is Spain's major market-cap-weighted index. IBEX 35 consists of 35 top companies traded on Spain’s main stock exchange called the Bolsa de Madrid. This index is governed by the Technical Advisory Committee that selects and reviews its composition. Some of the companies making up the IBEX 35 involve ACS, Almirall, Naturgy, and others.
Here are some of the other most popular stock market indices.
Stock market indices price is determined by fluctuations in the value of the constituent shares. Therefore, primary factors, having an impact on it are the same that move the value of the assets themselves. Here is the list of the most important ones.
There are several reasons why trading indices is gaining popularity in recent decades.
Naga is an innovative and efficient platform to trade indices. Having an intuitive interface it’s really easy to get started with. All you have to do is to follow these steps.
Indices trading means speculating on stock market indices, which, in turn, represent a basket of stocks and are used as instruments to monitor the performance of a particular industry or even economy. Indices trading is growing in popularity since it allows investors to get control over the larger market share by opening only one position.
Index futures are derivatives since they derive from the underlying index. They allow traders to speculate on price movements in the underlying market while taking profit from the difference in asset price between the value agreed at the start of the futures contract and the index price at the end of it.
Yes, you can. It’s not necessary to keep your contract until the expiry date. You can either sell it or buy a new contract for the opposite trade that will annulate your previous agreement.
After-hour means that trading happens after the market closes. It is considered to be helpful for part-time investors who can not trade during regular hours. However, after-hour trading is commonly associated with lower asset liquidity, higher volatility, and bigger spreads.
Stock trading is about investing in the stock of a particular company. Indices trading, in contrast, implies speculating on the indices price changes. Here it’s important to understand that an index is a measurement that represents the performance of a basket of stocks, not an individual stock. It means that while trading indices investors can enjoy less risk, greater market exposure, and lower volatility.
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