What are Indices?
“Indices” (plural: indices) are benchmarks of the performance of a group of stocks —usually of a particular market or industry.
Rather than investing in individual company shares, you’re investing in the overall performance of the market sector that the index is measuring.
– S&P 500 – Follows 500 of the biggest U.S. companies.
– Dow Jones Industrial Average (DJIA) – 30 biggest U.S. firms.
– NASDAQ-100 stocks – The biggest 100 non-financial technology-based stocks in the U.S.
– FTSE 100 – Britain’s 100 biggest companies.
– DAX – Germany’s leading companies.
– Nikkei 225 – Major Japanese companies.
How to Trade Indices?
You cannot purchase an index directly, but you can invest in its worth by utilizing various financial instruments:
1. Index Futures.
– Sale/purchase contracts for the index in the future at a set price.
– Traded on major exchanges like “CME” or “Eurex”.
– Used most frequently by hedge funds and institutional traders.
2. Index CFDs (Contracts for Difference).
– Forecast the direction of an index’s price without ever holding a share.
– Most favored by retail traders because they require less capital and leverage.
– Available on platforms like MetaTrader, IG, eToro, etc.
3. Exchange-Traded Funds (ETFs).
– Index funds that are traded like a stock.
– Example: SPY, ETF tracks S&P 500.
– Suitable for long-term investors.
4. Options on Indices.
– Products offering a choice (but not a requirement) to purchase/sell the index at a specific level.
– More advanced, for strategic speculation or hedging.
Why Trade Indices?
Diversification: Exposure to many companies under a single trade.
Volatility Opportunities: Significant price moves are caused by news or macro events.
Technical Trading: Indices tend to track technical trends more than individual stocks.
What Determines Index Prices?
– Economic measures (GDP, inflation, employment).
– Earnings announcements by companies (of index constituents).
– Central bank policies (i.e., interest rates).
– Political and global news.
– Market sentiment.