Financial markets have always been a proven way to make good returns on investments only if the right strategy is planned and executed. Despite the risks and possibilities of losses, the markets have evolved a lot in terms of investment opportunities such as futures and options, ETFs, CFDs, stocks, assets, etc. But for those who do not incline to sit and study the markets every day and take high leverage trades, the market also has a relatively passive option of index trading. the tech tural
What is an index, and how does it work?
An index is a collective term given to a group of assets that closely correlate with each other on a given factor. For example, Dow Jones Industrial Average DJIA is an index that keeps track of 30 of the most extensive blue-chip stocks in the US. Similarly, DAX or Germany 40 is an index that keeps track of the 40 biggest companies on the Frankfurt Stock exchange.
The price of an index can be calculated in various ways. Many indices calculate their price based on the market capitalization of the stocks or by a price-weighted average. This sets index trading apart from trading stocks or other assets in many ways and makes it a unique proposition in the financial market. Indexes have strict criteria for adding or removing stocks, such as the amount of liquidity available, publicly floating shares, market cap, and other factors.
Calculated differently as compared to singular securities
Imagine you are deciding to buy shares of XYZ bank, and the stock prices for that bank’s security fall a little while the overall banking sector has performed well during the same period.
This is where index trading helps by offering you a basket of securities as a collectively singular asset to trade, allowing you to look at the whole sector or group of stocks as one unit, which is easier to gauge and predict. In such a case, even if one of the 50 companies of the given index doesn’t perform well while most of the others do, the price of the index will rise.
Profits and losses work both ways
Unlike traditional investing in securities, where you buy low and sell high, you can make both-sided trades in the index markets. You can take up and hold a long or short position depending upon your decision and study of the market, and your profits or losses will be calculated accordingly.
The traditional spot trading option allows you to only buy and sell without any leverage. In contrast, in many cases, you can leverage trade and hold a more significant trade position on either the buy or sell sides. Your profits and losses are calculated according to your trade margin size, the leverage you may have taken, and the percentage movement of the market.
Best ways to help speculate possible index price movements
Take a look at the investor sentiment, announcements from the authorities such as central banks or federal reserves, looking at the currency rates, and important economic details such as inflation and CPI data.
Studying the companies’ financial results within the index you are considering helps understand past performance and possible future changes.
Changes within the index:
Keeping track of new stocks or securities added or the removal of existing ones to understand the shift in the performance of a given index.
Studying the chart based on various tools and indicators such as moving averages, relative strength index, Fibonacci, and many more.
Prices of commodities:
Fluctuations in commodity prices can impact many indexes due to the nature of securities within the index and their correlation with the commodities.
Each index is unique and holds high importance
Each of these and all other indexes differ based on the companies covered under them, how their price is calculated, the sectors or asset classes they cover, the economy they impact, and the extent of their overall impact. But the economic significance of indexes can run far more profound than the value of the money invested in them or their market cap.
For example, FTSE 100 covers 100 of the top companies in the UK and is a broad indicator of the UK economy as a whole. Similarly, DJIA and S&P 500 are referred to as indicators by investors to determine the general market trends, as these are based on key US stocks.
Some of the most popular exchanges worldwide
There are various indexes in countries across the world that include stocks from the countries’ exchanges. Here are a few of the most popular and renowned indexes:
- NASDAQ 100 – A basket of securities from 100 of the largest non-financial companies in the US that are listed on New York’s NASDAQ exchange.
- Dow Jones Industrial Average – DJIA covers 30 of the most prominent companies listed on US stock exchanges.
- S&P 500 – A collective tracker of the 500 largest companies listed across the US exchanges.
- Hang Seng 50 – A basket index covering the 50 biggest Chinese-based companies in the stock exchanges of the Schengen region, Hong Kong, and Shanghai.
- FTSE 100 – This index covers 100 top companies from all over the UK in market capitalization.
Index trading is a more viable option for many investors and traders worldwide, as indicated by its rising popularity in the past decade. This has led to the increasing importance of indexes in the broad market picture. But the possibility of profits doesn’t come without risks, so it is always advised to get complete and in-depth knowledge of markets and assets before trading or investing.
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