From Forex to the stock market, CFDs, ETFs, and cryptocurrencies, when it comes to investment, there is barely any shortage of opportunities available to you. However, some may be a little more tricky to understand or maneuver than others.
One of these markets with complexities is the index market. The index market exists as a unique variation of the stock market, giving investors even more ways to make some money.
What is index trading? Our article presents you with all important information about indices, including the various types of stock index markets, the ways you may trade indices, and a little more concerning global market indices, among others. Let’s get right in.
- An introduction to indices
- Explaining the categories of index markets
- About Global market indices
- Specialized indices
- Factors affecting the price of indices
- How to trade indices
An Introduction To Indices
Before we go into what is indices trading, we start with the basics. Indices measure the performance of a combined set of stocks traded on an exchange. An index represents the average price of several selected shares, with the performance of each of these determining the general index pricing.
Although indices may contain any mix of shares, the shares are typically selected from a unitary industry or local market. A grouping like this makes speculation easier for investors, as they deal with the performance of an entire economy sector rather than having to make specific predictions on individual share performances. Visit personalfinanceguru.com for additional information on investing in stocks.
What’s more, is that indices aren’t limited to the stock market. There are commodity indices combining certain hard and soft commodities in the commodity market and bond indices for the bond market.
Nonetheless, stock indices are the most prominent of all as exchanges make them more accessible to investors. Now, the stock index market is divided into three;
- National index market,
- Regional index market, and
- Global index market.
Explaining The Categories of Index Markets
National indices comprise the combined shares of companies listed on a local stock exchange like the London or Frankfurt stock exchange. They are the most popular of all three varieties and typically take cognizance of the top 40, even to the top 1000-performing companies in the economy.
A few of the most famous national indices include the S&P 500 (US stock exchange), the FTSE 100 (London stock exchange), and the Nikkei 225 (Japanese stock exchange).
Regional indices take it further and include company shares within a particular region. These regions are typically continents; a few more popularly-traded regional indices are the S&P Asia 50, the FTSE Euro 100, and the S&P Latin America 40.
These regional indices give investors and market analysts information about emerging markets. They also help us identify the frontier markets amongst all.
About Global Market Indices
The Global index market is all-encompassing. It covers the top companies around the globe, cutting across national and regional barriers. Although indices may include any combination of business shares, the more popular ones combine large-cap and mid-cap companies.
It is important to note that these indices don’t provide specific information for in-depth market analysis. You also trade on a mixture of companies affected by numerous local factors, which may make their performance harder to predict.
A few of the most popular global market indices include the MSCI world index, the Dow Jones Global Titans 50, the FTSE All-World, and the S&P Global 1200.
In addition to these three major varieties of indices are specialized indices combining hand-picked shares. Companies are selected based on a whole lot of factors, with these more commonly geared towards social or environmental inclinations.
Examples of indices in the specialized market include the S&P Global BMI Shariah index, the S&P 500 Shariah index, and the Dow Jones Islamic Market World Index, all representing Islamic-friendly investment shares.
Specialized indices may have a global reach, and the criteria for entry only limit the selection of companies. This is seen with the STOXX Global ESG Leaders index, which covers shares of companies that meet certain environmental, social, and governance requirements.
Factors Affecting The Price Of Indices
The elements affecting the price of an index are the same as those affecting the price of the individual company shares within it. These include fundamental market conditions affecting investor sentiments, like the company’s operations and results, or changes in the companies considered within the index.
Now, how do these individual shares act on the collective price of the index? There are two types of indices in this respect. These are capitalization-weighted indices and price-weighted indices.
Capitalization-weighted indices depend on the market capitalization of each company in the index. Here, changes in the market capitalization of the larger companies have more effect on the price of the index than low-cap companies.
Price-weighted indices take the price of each company share into account. This means the changes in the price of the more valuable company shares have more effect on the value of the index. So, what is indices trading?
How To Trade Indices
Index trading is simply you investing in these indices to make a profit. It is similar to other investments, where you create an account with a broker or exchange platform, choose your preferred index to trade on, and profit from changes in the price of these indices.
You may apply leverage to your trades to increase your profits and even use the index market to hedge your positions on certain shares in the regular stock market. You also have access to tools like stop losses and limit orders.
There’s more, however. Index CFDs give you more flexibility with your investments as you may enter both long and short positions. Unlike regular index trading, with short positions, index CFDs allow you to profit from a price decrease and come with futures trading options.
The question “what is indices trading?” has been answered, and we see that regardless of how peculiar it may seem, indices trading is just like any other form of trading.
All you have to do is make proper research on each of the companies that make up an interesting index and choose the right platform that allows you to trade on them. Note that the more popular indices have more market volume, allowing you to exit your trades at any time.