Stock Market

Indices are increasingly becoming popular in trading, as they offer exposure to broader market movements. Their built-in diversification reduces the chances of potential risks and makes them a popular choice among many traders.

If you are a beginner wondering how to trade indices, worry not. To help you navigate this challenging journey, here is a detailed guide on everything you need to know about trading indices.

What are Indices?

In trading, the indices are statistical measures that represent the collective performance of a group of assets, such as bonds, stocks, and commodities.

Here is a list of some of the most traded indices:

  • S&P 500: Tracks the performance of 500 large-cap companies, and all of them are listed on US
    stock exchanges.
  • Dow Jones Industrial Average: Represents 30 large publicly owned companies in the US.
  • FTSE 100: Tracks the performance of the 100 largest companies listed on the London Stock
    Exchange.

How are Indices Calculated?

Indices are calculated using various methods. It is basically all about comparing a current value to a base value. Some common methods used for calculating indices are:

● Simple Index Calculation

It is used to track changes over time relative to a base period. Its formula is: Index Number = (Value in current period / Value in Base Period) * 100.

● Price-Weighted Index

In this calculation method, each stock’s influence is determined by its price. To get the index, you have to sum the prices of all the stocks in the index and divide it by a divisor, which is adjusted to account for stock splits and other corporate actions.

What is Index Trading?

The buying and selling of different stock market indices is referred to as index or indices trading. But in reality, you do not own any underlying asset. In index trading, each index represents the performance of a selected group of various companies that are listed publicly.

Many traders use indices rather than trading any individual stock. By selling and buying different indices, they speculate on the overall direction of an economy or sector. It gives them a broader market exposure and an opportunity to generate more profits.

What moves an Index’s Price?

The price of an index is driven by the performance of individual stocks or assets that it tracks. Many factors affect this value, such as:

● Company Performance

Product announcements, earnings reports, leadership changes, and many other corporate events can cause a significant change in individual stock prices. It further impacts the index.

● Economic Data

Market movements are highly influenced by macroeconomic indicators, such as inflation rates, GDP growth, and employment figures.

● Investor Sentiments

How investors perceive the market’s future makes a big difference. Their sentiments are usually influenced by factors such as global news, political events, and economic forecasts. It ultimately drives the buying and selling activity in the market, leading to significant price changes.

● Geopolitical Events

Major global events, including wars, political instability, and natural disasters, create uncertainty and volatility in the market, impacting the index price.