Indices

What are indices?

An index is a way to measure the performance of a group of assets. In trading, this involves publicly traded companies and their stock prices.

One of the best-performing and most widely known indices in the world is the Dow Jones index. The Dow Jones Industrial Average (DJIA) tracks the overall performance of the 30 largest companies in the US. If the average price of the 30 companies goes up, the DJIA also climbs higher. If the average price of the 30 companies drops, the DJIA will decline too.

What is the indices market?

The indices market is the market where indices and related financial products are traded. This market is made up of top-performing groups of individual indexes from different countries and representing different sectors.

Below is a list of the most popular indices in the world. Many of them include “blue-chip” stocks. Blue-chip companies are typically well-established, considered to be market leaders in their sector, and likely to have a market capitalisation value in the billions of dollars.

• Dow Jones Industrial Average: One of the leading US stock indices, consisting of 30 large, US-listed companies.
• S&P 500: America´s most famous stock index, consisting of the 500 largest companies listed on stock exchanges in the United States.
• EURO STOXX 50: Represents 50 blue-chip companies listed within the eurozone. It can be seen as the eurozone´s version of the Dow Jones index.
• Nasdaq 100: One of the world´s most watched indices, consisting mostly of heavyweights in the technology sector. Despite its name, it actually consists of 101 securities issued by the 100 largest non-financial companies listed on NASDAQ.
• FTSE 100: An index representing the 100 companies listed on the London Stock Exchange with the largest market capitalisation.
• DAX 40: Germany´s most important stock index, consisting of 40 major blue-chip companies listed on the Frankfurt Stock Exchange.
• CAC 40: An index representing 40 major blue-chip companies listed on Euronext Paris.
• Nikkei 225: Japan´s leading stock index. It is a price-weighted index and tracks the performance of 225 large companies listed on the Tokyo Stock Exchange (TSE).
• Hang Seng: Tracking the performance of 73 large companies listed on the Hong Kong Stock Exchange.
• ASX 200: A benchmark index for the Australian stock market. It consists of the 200 largest stocks listed on the Australian Securities Exchange, measured by market capitalization.
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What is index trading?

Index trading is the buying and selling of a specific stock market index. Traders speculate on the price of an index rising or falling, which then determines whether they will be buying (going long) or selling (going short).

It is important to understand that an index only represents the performance of a group of stocks, and trading indices does not mean you are buying any actual underlying stock to take ownership of. Instead, you are trading the average performance or price movements of the group of stocks. When the price of shares for the companies within an index goes up, the value of the index increases. If the price instead falls, the value of the index will drop.

To understand what index trading is, we need to explore the factors behind the price movement.

The movement of index prices is primarily dependent on external forces. The price will decrease in times of uncertainty that bring weakness to the relevant country’s economy. Some factors that can impact the price of an index include:

• Global news: Events such as natural disasters, pandemics, political instability, conflicts, and wars can all have a major impact on indices. It could be confined to only one country (e.g., an earthquake in Japan) or it could have a global impact (e.g., a war between two or more countries).
• Economic news: Economic events and meetings such as central bank rate decisions, non-farm payrolls, trade agreements, and employment indicators can have a major impact on indices. Some could be specific to only one index; for example, UK employment numbers would primarily impact the FTSE 100 (Britain´s main stock index). Other events, such as the meeting of the US central bank, could impact indices all around the world because the USD is the dominant global currency.
• Index reshuffle: When a company’s stock is added or removed from a stock index, it can impact the price of the index. Generally, a reshuffling of the index is beneficial for investors, as it ensures only relevant companies remain part of the index. One example is the once-famous photography company Kodak. It was a part of both the Dow Jones 30 and the S&P 500 for a long time but was eventually dropped from both indices as it continued to struggle, and its market capitalization shrank.
• Company news: Earnings results, mergers and acquisitions, changes in leadership, and other major company-specific news can all affect the index of which the company is a part. The higher the weight of the company, the more impact the news will have on the index. For example, Apple announcing much better than anticipated earnings numbers would have a positive impact on both the S&P 500 and the NASDAQ 100.
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How does index trading work?

When you trade indices online, there are two main types: index ‘cash’ CFDs and index ‘futures’ CFDs. The main difference between the cash market and futures market is that the cash market does not have an expiry date. The futures market, however, has an expiry date, normally known as a ‘rollover.’ A futures contract is effectively an agreement between the buyer and the seller on the price that must be paid by the buyer at a given future date.