Indices

Indices Trading is a way of trading. It is made of a group of stocks and it is also called ‘Index’. An index is an instrument to measure the value of a section of the stock market. It is calculated from the prices of chosen stocks. 

There are various indices in the financial world, such as S&P/ASX 200 (Australia), FTSE100 (London), CAC 40 (France), AEX index (Amsterdam), DAX (Germany), IBEX 35 and more.

1. What are Indices?
2. What affects the Indices market?

3. How does the Indices market work?
4. Why trade Indices with First Financial Banc?

1. What are Indices?

Indices Trading is not the same as commodity trading, where a trader chose a commodity, or Forex trading where the trader invests in a particular pair of currency. An index is an instrument that reflects the health of a market or an economy, so when you decide to invest in an Index you are basically investing your capital in a fund that mirrors the behaviour of the index.

Indices allows you to invest in a very large segment of a market, or even an entire market itself. Let’s mention some options: FTSE 100, NASDAQ, Dow Jones, or the S&P 500, among other Indices, each of them reflect different market properties. By investing, let’s say in NASDAQ, you are investing in a significant portion of the technological market.

2. What affects the Indices market?

An index behave as its components do, whether they are market caps, fundamentals, or just the prices of the stocks. The empirical method used to calculate the index can also lead to different results.

Indices rates are influenced by a few factors, mainly:

Indices allows you to invest in a very large segment of a market, or even an entire market itself. Let’s mention some options: FTSE 100, NASDAQ, Dow Jones, or the S&P 500, among other Indices, each of them reflect different market properties. By investing, let’s say in NASDAQ, you are investing in a significant portion of the technological market.

► The index components

The companies which are included in the index will affect its price. The largest components to the index should be watched the most since they will direct the behavior of the index the most.

► Economic Data

Let’s mention S&P 500, this index is made up mostly by US stocks, so the economic data on the US economy will most likely affect the price of this index. Investors will look at data over inflation, unemployment rates, inventory levels and treasury yields.

► Politics

Trade wars and government regulations can have immediate effects on indices. Indices would be better if they are making business in conditions of free trade, deregulation and lower taxes.

3. How does the Indices market work?

First, let’s look at the ways to calculate the value of a stock index. There are many, but the most famous ones are:

► The Market Capitalization Weighted Method

The stocks in the index are weighted using the market capitalization of the individual companies. The company with the highest weight in the index will generally lead the most of index movements. The S&P 500 is an example of a market capitalization weighted index.

► The Equal Weighted Method

The return of each stock in the index is calculated and then summed and divided by the amount of stocks in the index.

► The Price Weighted Method

The stocks in the index are weighted by the price of the stock. This means that even a company might have a small market capitalization, if the stock's price is higher compared to the other companies, than this small market capitalization company with the highest stocks price will lead the behaviour of the index. The DJIA is an index weighted using the price-weighted method.

► The Fundamental Weighted Method

The index is constructed using fundamental facts like price to earnings ratios, earnings, book values and others.

Second, let’s look at some tips how to trade indices:

Stay ahead of the market

Before entering a trade, decide on a risk-reward ratio

Keep an eye on economic data to be released

Traders should always update their knowledge and skills

4. Why trade Indices with First Financial Banc?

- 10 years of online trading expertise
- Small group of traders and dedicated account managers
- Trusted by +300,000 traders worldwide
- Multilingual Customer Support - Market research with daily & weekly reports
- Global Liquidity & Instant Execution
- Segregated accounts with deposit protection