What Are Stock Indices And How To Trade Them?

Stock indices are one of the most popular financial instruments among NAGA traders. This is not surprising, as these assets are suitable for trading among beginners and professionals using different trading strategies. We have analyzed the features of stock indices as a trading instrument so that you can learn more about these assets by using them in your trading experience.

What are stock indices

Stock indices are financial assets that unite several dozens of companies’ shares by a particular characteristic (country, field of activity, capitalization, etc.). Accordingly, each index shows the general dynamics of changes in the price of a group of shares. This makes it possible to react faster to cardinal market changes in a certain field of activity. Indices also make it easier to assess the economic situation, allowing you to track growth, decline in price or a flat on long-term trends.

Most stock market indices are calculated according to the market capitalization of their component companies. This method gives greater weighting to larger cap companies, which means their performance will affect an index’s value more than lower cap companies.

However, some popular indices – including the Dow Jones Industrial Average ($DOW30) – are price-weighted. This method gives greater weighting to companies with higher share prices, meaning that changes in their values will have a greater effect on the current price of an index.

Stock indices have an alternative method of calculation. In most cases, the relative change of an index is more important than the actual numeric value representing the index. For example, if the FTSE 100 Index ($FTSE100) is at 6,725, that number tells investors the index is nearly seven times its base level of 1,000. However, to assess how the index has changed from the previous day, investors must look at the amount the index has fallen, often expressed as a percentage.

What are the most traded indices?

• Standard and Poor’s 500 ($SPX500) tracks the capitalization dynamics of more than 500 shares of the largest U.S. companies (worth more than $15 billion) listed on the NYSE or NASDAQ. The index covers more than 80% of the total capitalization of the U.S. stock market. More than a quarter of the index’s capitalization comes from nine giant companies such as Apple, Microsoft, Alphabet/Google, Amazon, Meta Platforms/Facebook, Tesla, NVIDIA, Berkshire Hathaway and JPMorgan Chase.
• NASDAQ ($NAS100) includes almost all stocks traded on the NASDAQ. It is predominantly an index of demand dynamics for stocks of information technology companies. The top 100 non-financial companies traded on the NASDAQ Composite account for over 90% of the movement in the NASDAQ Composite.
• Dow Jones ($DOW30) is the oldest existing U.S. market index. It was created to track the development of the industrial component of U.S. stock markets. The index covers the 30 largest U.S. companies, including Boeing, Chevron, Coca-Cola, General Electric, Intel, IBM, and others.

There are also indices traded on NAGA. For example, the DAX30 ($DAX30), tracks the 30 largest companies in Germany or the Nikkei, which includes the largest Japanese companies from various sectors. Accordingly, every developed economy in the world has its own stock index, which you can trade in CFD format.

How to predict the price of indices?

To trade stock indices efficiently and profitably, you need to analyze and predict their quotes. NAGA has all the necessary tools for analysis, including detailed charts, built-in charting tools and indicators, and more. However, there are several external (fundamental) factors that you need to consider when predicting the price of indices:

• Economic news – investor sentiment, central bank announcements, payroll reports or other economic events can affect underlying volatility, which can cause an index’s price to move
• Company financial results – individual company profits and losses will cause share prices to increase or decrease, which can affect an index’s price
• Company announcements – changes to company leadership or possible mergers will likely affect share prices, which can have either a positive or negative effect on an index’s price
• Changes to an index’s composition – weighted indices can see their prices shift when companies are added or removed, as traders adjust their positions to account for the new composition
• Commodity prices – various commodities will affect different indices’ prices. For example, 15% of the shares listed on the FTSE 100 ($FTSE100) are commodity stocks, which means any fluctuations in the commodity market could impact the index’s price.

Ways to trade stock indices

Indexes were created to track the dynamics of financial markets, so you cannot purchase a certain number of index units as you can in the case of company stocks. You can trade stock indices (including futures or index derivatives) using contracts for differences.

It allows you to open Buy and Sell orders on any volume of indices, setting Stop Loss and Take Profit at the same time. Consequently, you can profit by trading the indices at any price change, as well as at bearish and bullish markets. This is very advantageous because you do not have to wait for the best moment to open an order. Analyze, predict and open a trade at any time, whether the price is going up or down.

With CFDs, your profit or loss is determined by the accuracy of your prediction, and the overall size of the market movement.

In addition, you can use any trading strategy in stock index trading:

• Long-term strategy means opening trades for a long period, from a few weeks to a few months.
• Short-term strategy means opening trades for a short period, from a few hours to a few days.

Use all the analytical possibilities with the NAGA’s enhanced and well-built tools in order to increase your chances for profitable trades.

Conclusion

Stock indices are critical to measuring performance and can provide investors with valuable information about the performance of larger segments of the stock market in a more convenient and easily interrupted package. They can also form the basis of a solid long-term, low-cost investment strategy, and they are well worth following and researching further.

Summary

• Stock indices are one of the most popular financial instruments among NAGA traders.
• Stock indices are financial assets that unite several dozens of companies’ shares by a particular characteristic (country, field of activity, capitalization, etc.).
• With CFDs, your profit or loss is determined by the accuracy of your prediction, and the overall size of the market movement.
• Use all the analytical possibilities with the NAGA’s enhanced and well-built tools in order to increase your chances for profitable trades.