May 20, 2022
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If you belong to the financial community, there are chances you are aware of the term “Indices trading”. For a good reason, it is prevalent among the members of financial institutions, investors and traders. Trade indices enable investors and traders to gain exposure to an entire economy through a single trade. However, one of the key things to success in trading is understanding indices better, how it works, and why people are more and more attracted to them. So if you are interested in learning more about indices trading, continue reading! This article will walk you through some basic questions that swirl in every trader’s mind (might be in yours, too) before stepping into trading.

What are indices?

Indices are a measurement that helps you analyse the performance of a group of shares. Traders and investors use indices as benchmarks to gauge the performance and movement of a particular market segment. Moreover, the indices are calculated based on the market capitalisation of their constituent companies. This is why the larger cap organisations are offered greater weighting, as their performance will have an impact on the indices more than the lower cap organisations.

There are seven types of indices that you need to know:

  • Global stock market indices
  • Regional stock market indices
  • National stock market indices
  • Industry based stock market indices
  • Exchange-based stock market indices
  • Currency indices
  • Sentiment indices

You must have heard about FTSE 100; it tracks the top 100 companies on the LSE (London Stock Exchange). A few well-known indices, namely Dow Jones Industrial Average, S&P 500 and Nasdaq Composite, are ranked by independent institutions like Standard & Poor’s, FTSE Group, and Deutsche Borse. Then there is DJIA (Wall Street) which tracks the value of the 30 largest blue-chip stocks in the US. Similarly, DAX (Germany 40) measures the performance of the 30 largest organisations listed on the Frankfurt Stock Exchange.

What is index trading?

As the name suggests, Index trading is the trading of the index, which means selling and buying a specific stock market index. However, it is not like Forex trading, where an investor invests in a currency or commodity trading, where one is interested in a commodity. That said, an index is a measurement representing the performance of a market or the health of an economy. When investing in an index, you invest in a substantial segment of a market or even an entire market itself. When the price of shares for the market or companies goes up, the index’s value increases, which means you are in profit. On the other hand, if the market value falls, the index will drop, which means you are at a loss. It is as simple as it seems!

Why trade indices over shares?

This is another important question that investors and traders often encounter: Why index trading and not trading in shares? If you are also unsure about stepping into trade indices, you will be glad to find this article.

  • Indices are the least manipulative financial instruments: The value of the index changes according to the fluctuations in the performance of the constituent companies.
  • Indices need no technical analysis: Traders do not need to spend hours analysing thousands of stocks for the right company. Instead, they would have to work on a single chart.
  • Indices have no risk of bankruptcy: An index can’t go bankrupt, unlike holding stocks in an individual company. If a company goes insolvent, you will lose your investment. But in indices, it never happens.

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