Indices are instruments which represent a group of companies which belong to the same industry and are traded in the financial market as a group of stocks. One of the leading indexes is the S&P 500, which shows the general value of top tech companies. It works like this, if the overall value of those companies rises, the value of the index will go up also.
There are indexes even for small companies, all over the world. For example, Russell 2000 index, HIS- China, NIKKEI- Japan, DAX- Germany, AEX- Dutch.
Stock Indices track certain stocks like a basket of stocks. The importance of each stock in the index is measured in different ways. It is important to emphasize that indices provide an accurate way to evaluate the economy as a whole. It is a reliable indicator of how an economic sector is performing and each stock can be compared to its siblings inside the index to check if they are performing well in the market.
Why trading Indices?
The advantage of trading indices instead of stocks is that they offer a wider access to the industry as all. Traders do not need to check on the individual company reports, they only need to perform a short or long position, depending on the overall market sentiment.
Still, individual stocks perform various activities, enough to give indices the volatility that traders need to make profits in the market. This is especially related to day traders who take actions based on the daily news which affects the individual stocks price.
The majority of developed countries, and developing ones, have at least one financial index. For example, France has CAC 40, Germany has DAX 30, Japan has NIKKEI 225, UK has FTSE 100 and so on. Index trading is a relatively more secure option to trade your capital, compared to other options. The risk is better diversified inside of an index, so your capital is safer while trading indexes. The price of an index changes due to the price fluctuation of the companies it is compounded by. When you trade indices, you are not putting all your eggs into one basket. With the Nasdaq 100 you diversify your trading capital into the most profitable American high-tech companies.
Which Indices should I trade?
The first index was created in 1896 by Charles Dow, and it is widely known as the Dow Index. Today, The Dow contains the 30 largest american companies. What makes the difference between the indexes is the reputation and the economic well being of the compounding companies.
Dow Jones Industrial Average (US30)– It includes 30 most influential US companies. It is price-weighted, meaning that companies with higher share prices have a bigger impact on the performance of the index.
S&P 500 (SPX500)– It is float-weighted, meaning that the stocks with higher market capitalization and the higher percentage of the company publicly traded, influence the index the most.
FTSE (UK100)– It contains the 100 highest market capitalisation companies on the London Stock Exchange. Its value is proportional to its compounded companies. The larger the company, the larger the impact in the index.
DAX (GER30)– It is made up of the 30 major companies in Germany. It is very similar to the Dow Jones Industrial Average in the US.
Nikkei225 (JPN225)– It is the primary stock index in Japan and it is price-weighted, same as the Dow Jones Industrial Average of the US.