Indices are also called “the blue-chip of the market” and are most actively traded. The indices have many shares in trade with a small spread, so they can easily gain or lose value. Indices trading gives investors exposure to financial markets without investing in a company’s stock directly.
Stock indices trading is a very popular way to trade stocks. You can trade all major global indices from one single platform with MetaTrader Indices. Indices are divided into three categories; the most famous are composite indices, divided further into capitalization-weighted and equal-weighted indices. The majority of indices with which traders operate are composite indices, and they measure a group of securities (stocks) representing a market (index).
An index attempts to reflect the status of a broad industry sector or a country’s stock market as a whole by tracking the performance of a large group of shares. Active and passive index-linked funds and derivatives are created by fund providers for investors to buy and sell. The indices reflect the overall stock market performance. Movement in value of an index shows the health of the sector that it tracks.
Popular Stock Indices
- Dow Jones: Represents 30 of the USA’s biggest publicly owned companies and is often referred to as “Wall Street.”
- FTSE 100: Also known as the “UK 100,” comprises the UK’s 100 biggest companies by market capitalization.
- NASDAQ 100: Comprising of over 100 tech companies in the USA, it’s a capitalization-weighted index known as the “US Tech 100.”
- The DAX: This index is sometimes called the “Germany 40” and consists of 40 major German companies.
- CAC 40: Also known as the France 40, it comprises 40 of France’s largest companies by capitalization.
Why Trade Indices
Individual investors may prefer to trade indices when saving for retirement. This is because they get access to a wide range of companies which allows for diversification when extreme volatility occurs. Index values fluctuate throughout trading sessions, but there won’t be significant gains or losses unless there’s a specific event causing it, such as market crashes or natural disasters. So, why do investors opt for indices trading? The main advantages are:
Ample trading opportunities: Stock indices are always moving up and down throughout market hours, meaning there are endless opportunities for traders.
Trading in both directions: If you are trading indices along with CFDs, you can trade in both directions. Go long to profit from upward price movements or go short to profit from downward price movements.
Low starting capital: One of the main advantages of CDFs is that you can use leverage to control a more significant amount of money. For instance, if you leverage 2x the starting amount of $1,000, you will control $2,000. Now you can trade indices with a low capital amount.
Stock Market Index Prices
The prices of the stock market index vary based on the share prices of the constituent companies. The performance of the larger components exerts more influence on indexes which are weighted averages.
Economic indicators: The overall performance of stock markets influences central banks’ interest rates, such as the United States Federal Reserve, European Central Bank, and the Bank of England. Including lower interest rates and actively buying assets, expansionary monetary policy boosts stock market rallies, while higher interest rates weigh stock markets.
Exchange rates: Currency exchange rates can also affect indices weighted toward companies that derive the majority of their income outside of the United States. The FTSE 100, for example, includes companies that have profited from the weakening of the pound sterling in recent years, as sales revenue in foreign currencies were converted into pounds at a greater rate.
Political events: Elections and other political events can have an impact on the stock market. International markets are influenced by US presidential elections, as investors analyze the effects of a new administration’s policies on the world’s largest economy.
How To Trade Indices
Trading stock market indices is a means for private investors to become exposed to global or regional markets without taking the time to analyze several individual companies’ financial statements. It also decreases the risk of exposure to poor performance or bankruptcy of your portfolios. There are many ways that private investors can trade indices.
Passive funds: Passive funds, also known as tracker funds, hold equities in the same proportion as the index to replicate the index’s performance.
Active funds: Fund managers manage active funds intending to outperform the index. Dividends paid on the index’s company stocks are collected using investment products like mutual funds. They either disperse the funds to investors (distribution fund) or reinvest them (accumulation fund). The annual fee is based on a percentage of the fund’s value.
ETFs: Investors are increasingly using exchange-traded funds (ETFs) to trade index funds. ETF fund managers, such as Vanguard, impose reduced fees, allowing investors to keep a larger portion of their profits. An ETF’s price fluctuates during the trading session since it is traded on exchanges, unlike a mutual fund’s price, which is settled once a day. Apart from index funds, investors can trade various derivative products based on indexes to maximize their profits. Investors can use options or futures contracts to hedge against indices fluctuating in value or to bet on whether they will rise or fall over a short period.
CFDs: Contracts for difference (CFDs) on online trading platforms are another popular
approach to trade global indexes.
Trading global indices allow you to speculate on price changes in important indices
from the United Kingdom, the United States, Europe, Asia, and Australasia. It will also be possible for you to profit from market movement over a wide range of companies and not just a particular industry. There is more chance, and the risk of high volatility can also be reduced.
For more helpful information about trading, check out our education section.