What Indices Are and How to Trade Them?
You can trade indices in any part of the world. There are large indices in the USA, Europe, Asia, and Australia. The largest American indices are the following:
- The Dow Jones (DJI)– This index measures the value of the 30 largest blue-chip stocks in the US.
The NASDAQ 100 (US Tech 100)– This index reports the market value of the 100 largest non-financial companies in the US. - The S&P 500 (US 500)– This index follows the value of 500 large-cap companies in the US.
In Europe, you can trade such indices as the DAX, the CAC, and the FTSE: - The DAX (Germany 30)– This index tracks the performance of the 30 largest companies listed on the Frankfurt Stock Exchange.
- The CAC (France 40)– This is the French Stock Market tracking the 40 largest French stocks based on the Euronext Paris market capitalization.
- The FTSE 100– This index measures the performance of 100 blue-chip companies listed on the London Stock Exchange.
In Asia, there are several large indices. The most popular among them are the following: - The Hang Seng– This is a market capitalization-weighted index of the largest companies that trade on the Hong Kong Exchange.
- The Nikkei 225– This is the leading index of Japanese stocks. It is composed of Japan’s top 225 blue-chip companies traded on the Tokyo Stock Exchange.
- The ASX 200– This is a market-capitalization-weighted stock market index of stocks listed on the Australian Securities Exchange.
How Are Indices Calculated?
Most stock market indices are calculated using the Capitalization-Weighted Average. This method gives greater weighting to larger-cap companies. That is, it takes the size of each company into account. The more a particular company is worth, the more share’s price will affect the index as a whole. Lower cap companies will affect the index’s performance to a lesser degree.
Some popular indices are, by contrast, price-weighted. The Dow Jones and the Nikkei 225 are price-weighted indices. This method gives greater weighting to companies with higher share prices. Changes in their values will affect the current price of an index more than changes in companies with lower share prices: a stock trading at $200 will influence the value of the Dow Jones or the Nikkei more than a stock trading at $55.
Note that because indices are numbers, you cannot sell or buy them directly. To trade a certain index with Fintxpert, you need to choose either Index Funds or Exchange-traded funds, or Futures, or Options, or CFDs. All of these products track the price of the underlying index. Also note that because they are made of so many stocks, the value of indices is always shifting. Indices are more volatile than individual shares. They do provide traders with multiple trading opportunities. Yet they also increase traders’ risk.
Why Do You Need to Trade Indices?
Despite the risks involved in trading indices, any index can potentially provide you with many trading opportunities and various ways of trading. When you trade indices, you can go long or short, trade with leverage, and hedge your existing positions.
Go Long or Short
You can go long or short when trading an index with Fintxpert, provided you trade it with CFDs. When you go long, you are buying a market, because you expect the price to jump. When you go short, you are selling a market, because you predict that the price will slide. With CFDs, your profit or loss is determined by the accuracy of your prediction together with the overall size of the market movement.
Trade with Leverage
CFDs can be leveraged. That is, you need to invest only a small initial deposit, called a margin, to open a position giving you much larger market exposure. But note that when you trade with leverage, your profit or loss is calculated using the size of the entire position, not just the initial margin invested to open it.
Hedge Your Existing Position
If you trade different shares, you may short your index to prevent losses in your portfolio. When the market enters negative territory and shares’ value diminishes, the short position on the index will increase in value and will thus offset the losses from the stocks. But note that when stocks rise, the short position of the index will offset a proportion of the profits you have earned.
But suppose you have a short position on several individual stocks featuring on the index where you trade. If this is the case, you can hedge against the risk of the price’s increase with a long position on the index. When the index jumps, your index position will bring you a profit and, in so doing, will offset a proportion of the losses on your short stock positions.
More volatile than individual shares, indices can bring you lucrative trading opportunities and handsome profits. Sign up with Fintxpert now and confidently trade indices with us.