Indices trading

DEFINITION of Indices trading

Indices trading is when traders attempt to make a profit from the price movements of indices.

WHAT IT IS IN ESSENCE

There are many indices available for trading, measuring the performance of the stock market of various different markets. Including countries or sectors, or types of commodity. Indices traders can be focused on a single index, or trade various indices as part of an extensive strategy.

In its most regularly traded format, an index is defined as a portfolio of stocks that represents a particular market or market sector. Most major economies as well as developing economies have at least one financial index.

Stock indices give you a chance to trade an opinion of an economy without having to pick individual stocks.

With unique benefits to both CFD trading and spread betting, indices are some of the most popular products to trade.

Historically, investors needed a way to analyze the overall performance of the market. After all, you could never make a statement on the US economy by only looking at, say, Apple Inc.’s stock. This need begat the stock index. Generally, it is a collection of top-performing stocks whose purpose is to give a quick glance at the market as a whole.

An index is a good way to look at particular markets. But for investors, it offers a way to gauge the performance of their individual portfolios. So underperforming specific investments can adjust to being more in line with the general trend of the market.

Indices can have a variety of variables.

For starters, the number of stocks in any particular index can vary wildly, from a few dozen companies to thousands. Through weighing you can find the price of an index. Price-weighted indices are averaged based on the price of each component stock.

Capitalization-weighted indices adjust the calculation based on the size of the companies included. Many other factors are represented depending on the stock index in question.

HOW TO USE

Actually, it isn’t possible to buy or sell an index as you can a stock or commodity. As they are indicators of the price movements of several assets. And have no actual physical basis to trade.  

As an alternative, indices traders use derivatives like index futures, spread bets, CFDs, and ETFs to speculate on the movements of various indices.

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.