The most popular
Indices are preferred among traders for their high levels of liquidity and tradability. Learn more about indices and why they
are a popular choice among traders. Our traders get to choose some of the most popular indices to trade. Discover more
What is an index?
An index is a combination of several stocks from a particular exchange. An index measures the price performance of a said group of stocks. Because of that, their values correlate with the respective prices and are therefore constantly changing.
As a result they increase the price go up and fall if the prices go down. Each index is calculated in a slightly different way, but its value generally represents a weighted average of the current values of its component stocks.
To trade indices, traders can go long on a particular index if they believe that stocks in that market are likely to increase overall in the future, or go short on an index if they predict that the index is likely to drop in value.
Why trade indices?
Traders are able to gain exposure to all companies that are in the index, without the need to buy into each individual company share.
Buying an index can save a trader considerable amount of money, while still allowing them a great deal of diversity.
More gains than losses
Stocks and indices are priced differently. The price of an index is the average of the stocks in the index. Which means if a company stock goes up or down, the trader will be at the mercy of just one company share movements.
What factors influence indices?
Since an index comprises of stocks, the same factors that affect share prices will influence the price of indices. Below listed are some of the reasons why price of indices might fluctuate:
Economic growth creates better opportunity for growth and helps businesses make more profits as demand for goods and services increases. As a result, this increases the price of shares.
Political instability can also influence certain commodities. Iraq is among the major oil producers in the world. Increase political tensions in Iraq can therefore cause price of oil to fluctuate.
Economic and political shocks
Interest rates can be increased or decreased to stabilize or stimulate an economy. For example, if a bank raises interest rates, the cost of borrowing money increases. As a result a company’s profit and dividend may drop, resulting in a fall in the price of stocks due to low demand.
Conversely, lower interest rates boost economic growth and make firms more profitable. A fall in interest rates will make shares relatively more attractive, therefore encouraging traders to invest more in shares. A boost in the demand for shares will most likely cause price of shares to go up.
What are the most popular indices to trade?
Dow Jones Industrial Average (DJIA)
The DJIA is the most frequently traded index worldwide. It comprises of stocks from 30 of the largest companies in the United States and it represents approximately 25% of the US market.
The S&P 500 comprises of 500 of the most widely traded companies in the US. It represents approximately 70% of the total financial value of the US stocks markets. Being more diverse than the DJIA, S&P 500 give a better representation of the condition of the US stock market.
The NASDAQ comprises mainly of technology stocks. It is very popular among traders who want to gain exposure to the volatile and high growth stocks of technology firms.
Other indices available to trade are the FTSE100, Nikkei 225 and Shanghai Composite.