Indices To Trade – Which ones to choose and Why?
Indices to Trade – Introduction
Stock market investors and traders have the option of trading in stocks or a basket of stocks listed in the exchange.
They may also use their trading accounts to invest in forex, derivates, CFDs and other instruments.
Indices to Trade – which ones are the best?
The most popular form of retail trading is in stocks.
Trading exchanges in different countries list the stock prices of companies listed in their exchanges. Several brokers offer powerful tools to make quick trades in these stock markets.
Traders may buy and sell such stocks using their accounts. The discerning 21st century investors trade across the global markets.
But keeping track of hundreds of stocks is a difficult task, even for full-time traders. The best way to identify the direction of the stock market is to track indices.
Trading the indices market is an effective alternative to investing in individual stocks. Such a strategy is comparatively low-risk as well. Tracking indices price movements is much than tracking the price of hundreds of companies.
Indices are also traditionally loss prone to extreme volatility. While severe price changes can occur, it is less likely that a whole sector would be affected rather then a single company in the index.
There are different types of indices. The best indices to trade in the world is NASDAQ, Dow-Jones, S&P Global 100 and S&P Global 200 index, FTSE All-World Index, and more. These indices list a collection of stocks in the respective exchanges.
- The FTSE 100 co-opts 100 companies with the highest market cap, listed on the London stock exchange. The FSTE includes top global conglomerates such as Rio Tinto and Royal Dutch Shell.
- The Dow Jones Industrial Average benchmark index comprises of the 30 largest companies in the U.S.A. The index tracks the share price of these blue-chip stocks on the NASDAQ and the New York Exchange.
- Likewise, the DAX index tracks 30 top German companies listed on the Frankfurt Exchange.
- The Hang Seng index tracks the prices of top stocks trading in the Hong Kong exchange.
- The DJ Japan Index, S&P Japan, 500 and TOPIX include the Japanese brands.
Apart from these top indexes, several regional indices track a wide range of all types of stock.
Read Also: Index Trading for Beginners
What are the major world indices to trade?
The major trade indices are the bellwether of the respective financial markets.
The constituent companies of these popular indices are very influential. For instance, the blue-chip stocks listed in DAX and the German stock market have a major impact on the German economy, and also the European economy.
The SZSE Composite Index, an index of 500 stocks traded at the Shenzhen exchange, features companies that influence the Chinese economy.
Movements in these indices are a huge driver of wealth creation.
Tracking the market price of the index stocks offer huge opportunities for traders. The price movement of these influential companies can sway the price of other companies also. For instance, when Johnson & Johnson reported a five percent decline in sales, the company’s shares and also the stock market went down. The DJ industrial average slipped more than 0.5 percent as an impact of these results.
The price movements of the indexes depend on the nature of the index.
Price-weighted indices consider the price movements in absolute terms, and disregard the percentage change. Thus, a stock increasing from 80 points to 90 points will have the same effect on the index like a stock increasing from 10 points to 20 points.
Higher priced stocks, where the movement of prices is greater, exert a greater influence on the index.
Stocks in the technology sector and infrastructure stocks generally have a high price, and hence influence such index more. In contrast, market-weighted indices, also known as capitalization-weighted indices, or market-value-weighted index weighed companies based on the market value of the outstanding shares.
The best trading account allows you to keep track of all the major indices and also other trading instruments.
The options for indices trading strategy include investing directly in the index stocks, buying exchange-traded funds that track the major stock indices, or trading CFDs.
Smart traders make their trading decisions outside these stock market indices as well. Some of the biggest companies, including industrial companies do not find a place in the indices.
Day Trading and Value Investing
The best brokers offer trading platforms and accounts for intra-day trading and other trading options.
The platform lists the trading price of individual companies and allows traders to buy or sell during market trading hours. Some exchanges also allow placing orders during off market hours. It is possible to trade in market indices also using the short term trading and derivative options.
The stock price movements, and by extension, the movement of the indices, depend on several factors.
The key factors include the inherent value of the stock, the economic performance of the company, upcoming stock splits, how the government monetary policy impacts the stock, the extent to which pension funds invest in the stock, market events, and even the overall market sentiment of the time
The savvy investor knows the difference between fundamental analysis and market analysis.
The former, based on financial statements, seeks out the intrinsic value of the stock. The latter, based on price movement charts, identifies the right time to enter or exit the market. Day traders rely more on market-based analysis.
The best brokers offer investment advice and investment recommendations.
- They hire experts to make value and technical analysis of financial instruments.
- Their research offers insights such as the Price-Earnings ratio (PE ratio) of the stock, Book Value, Earnings Per Share, and other key ratios.
- They also analyse various charts to reveal if a specific stock is overbought, helping day traders make informed decisions. These analysts keep a close watch on the major data releases by the companies, exchanges, and the government.
- They adjust their recommendations after studying the impact of such data. The research insights offer investment and trading opportunities.
Traders may fix their risk management strategies based on such insights.
Several investment funds make such analysis and offer ready-made investment products to investors. Good financial advisors help individual investor make profitable trades.
Spread betting accounts allow traders to speculate whether the price of the underlying asset will rise or fall, without owning the asset. The stockbroker offers a bid price and the asking price, with the difference being the spread. The spread-betting broker profits from the spread. Thus, unlike most securities trade, traders may make spread bets without commissions. Tight spreads develop when the bid-ask spreads narrow. Such a condition indicates high liquidity and high trading volume.
Another major trading opportunity offered by brokers is forex. Trades in forex take place in pairs. A forex pair is the price quote of the exchange rate for two different currencies, such as USD-Euro. When a trader places an order on forex currency pairs, he buys the first currency and sells the second currency.
Trading Indices through CFD
One of the common types of trades in the forex market is CFD, or Contract for Difference. The trade is the difference in settlement price between the open and closing trades.
Trading in indices through CFDs is also a popular option among traders.
Forex competition makes many brokers offer special bonuses to attract customers.
The answer to the question “the best indices to trade?” depends on the investment objectives.
A successful trader has a sound risk appetite and makes investment strategies considering the risk profile of the indices under consideration. They use risk management tools that consider risk tolerance and indicate sound investment decisions.