What are Indices?

Indices are an evaluation of the price performance of a group of shares from an exchange. In an instance, 100 largest companies on the London Stock Exchange are being tracked by FTSE 100. Trading indices allows the trader to have an exposure to the whole economy or sector yet having to open a single position only.

A trader can wonder about the increasing or decreasing price of the indices without having an ownership of the underlying asset with CFDs. Since indices are a highly liquid market to trade, having more trading hours compared to other markets, a trader can receive longer exposure to possible opportunities.

Calculation of Stock Market Indices

According to the market capitalization of their component companies is what most of the stock market indices are being calculated. This method allows higher weighting to larger cap companies. The performance of the larger cap companies will have an effect in the index’s value more than lower cap companies

There are some popular indices that are price-weighted like Dow Jones Industrial Average (DJIA). This method allows higher weighting to companies having higher share prices. This means that their values will have a greater effect on the index’s current price.

The Most Traded Indices

  1. DJIA (Wall Street) – evaluates the value of the 30 largest U.S. blue-chip stocks
  2. NASDAQ 100 (US Tech 100) – describe the market value of the 100 largest nonfinancial U.S. companies
  3. DAX (Germany 30) – follows the performance of the 30 largest companies on the Frankfurt Stock Exchange
  4. S&P 500 (US 500) – follows the value of 500 large cap U.S. companies
  5. FTSE 100 – evaluates the performance of 100 blue-chip companies on the London Stock Exchange

Factors Affecting the Movement of Index’s Price

  • Economic news – announcement from central bank, investors’ sentiment, payroll reports or other economic events can influence underlying volatility
  • Company announcements – possible mergers or change in the leadership of the company can possibly influence share prices either positive or negative effect
  • Company financial results – profits and losses of individual company will cause share prices to increase or decrease
  • Changes to an index’s composition – when companies added or removed, weighted indices can see a price movement. This is caused by the traders adjusting their positions to account for the new composition.
  • Commodity prices – different indices’ prices can be affected by various commodities. For instance, 15% of the listed shares on the FTSE are commodity stocks that any changes in the commodity market could affect the index’s price.

Other things about Indices

Indices Trading – it is when a trader takes a position on a stock index. Stock index is a measure of the performance of various companies. Indices trading is a method to have an exposure to a whole economy or sector at once yet not opening positions on lots of various shares.

Profit on Index Trading – profit form index trading is possible by accurately predicting the index’s price actions. In an instance, if the trader thinks that FTSE 100 will rise, he will open a long position or if not, open a short position. The profit and loss are determined based on the extent to which the forecast is correct.

Buy Index Futures – this means that the trader is opening a long position on an index thinking that the price will increase. Correct forecast will make a profit otherwise will incur a loss.

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