Equity indices are a spendthrift’s delight. For the uninitiated, an equity index is a mathematical measurement of the collective value of a selected group of stocks representing a portion of the market. It is constructed to represent the health of the stock market or specific sector and can be used as a benchmark to compare current and historical performance.
The Dow Jones Industrial Average in the US is the best known, which comprises 30 large publicly traded companies, but others include NASDAQ, S & P 500, and Russell 2000. In Europe, there’s the FTSE 100 Index in the UK, CAC 40 in France, DAX 30 in Germany, and IBEX 35 in Spain.
These indices provide a real-time assessment of how a cross-section of stocks from each respective country is performing. When you trade cash equity indices with ATFX, you are simply speculating in which direction you think the index’s price will move next without having to buy or sell any underlying shares. Trading cash equity indices allows us to tap into rising or falling markets quickly and easily.
CFD (contracts for difference) traders don’t have to concern themselves with things like interest and dividends, as these factors are priced into the contract when it is first created. We simply take a view on whether we think an index will rise or fall over any given timeframe and express that view accordingly.
What is global equity index trading?
Index trading is one of the most popular ways for investors to gain exposure to the financial markets without investing directly in stocks, bonds, commodities, or other assets.
Those active in the financial markets for the first time often start with index trading, which means you trade an index fund or a basket of stocks instead of buying and selling individual stocks in a company.
Many CFD traders gravitate to index trading for a variety of reasons. First, indices are open for extended periods, meaning there is less risk of missing out on opportunities due to market closures. Second, indices tend to be volatile, providing ample opportunity for profitable trading. Finally, indices offer diversification away from single stocks, which can be riskier. Overall, index trading provides an attractive option for many CFD traders.
How are stock indices valued?
Most stock index markets are calculated using the market capitalization of their constituent companies. This means that the larger a company’s market capitalization, the more significant the impact of its share price on the index value as a whole.
However, some popular indices, such as the Dow Jones Industrial Average (DJIA), are price-weighted. With such a method, companies with higher share prices are weighted more heavily, meaning that their changes in value have a more significant impact on the current index price.
What are the most popular stock indices?
The world’s most traded stock indices are:
- DJIA (Wall Street) – Measures the value of the 30 most extensive blue chip stocks in the US
- DAX (Germany 40) tracks the performance of the 30 largest companies listed on the Frankfurt Stock Exchange
- NASDAQ 100 (US Tech 100) reflects the market value of the 100 largest non-financial companies in the US
- FTSE 100 measures the performance of 100 blue chip companies listed on the London Stock Exchange
- S&P 500 (US 500) tracks the value of the 500 largest market capitalization companies in the United States.
What moves stock index prices
An index’s price can be affected by a range of factors, including:
- Economic news – Market sentiment, central bank announcements, payrolls or other economic events can affect underlying volatility, which can cause an index to move.
- A company’s annual reports – the profits and losses of individual companies cause share prices to rise or fall, which can affect the index price.
- Company announcements – Changes in corporate governance or potential mergers can affect share prices, which can also affect the index price positively or negatively.
- Changes in index composition – for weighted indices, prices can change as companies are added or removed, as investors adjust their positions to reflect the new composition.
- Commodity prices – different commodities affect the prices of the indices For example, 15% of the stocks listed in the FTSE 100 are commodity stocks. Accordingly, fluctuations in the commodity market can affect the index price.
Indices represent entire stock markets or industries and measure the overall performance of all stocks included in the index. Suppose a notable event is about to happen that affects the entire market and not just a few specific companies. By taking an index position, you trade how the event affects a broad cross-section of an economy’s or sector’s significant stocks.
To get a similar level of exposure when trading traditional assets, you would have to pay the time and money cost of buying individual stocks that make up the index or trading exchange-traded funds (ETFs). In other words, an index is a quick and direct way to speculate on price movements in the overall market.
