How Indices Trading Works

Before we delve into the intricacies of indices, an important question to address is, what are indices? An index provides the means by which to measure the performance of a group of assets. Also referred to as a share index, these groups are typically publicly traded companies.

A prime example of a share index would be the FTSE 100, which can be found on the London Stock Exchange or the Dow Jones Industrial Average (DJIA), which represents 30 of the largest companies in the US and tracks their overall performance. Should the average price of those 30 companies increase, so too will the value of the DJIA.

Should the average price of the aforementioned companies drop, then the DJIA will decrease in value. Typically, a share index is made up of highly valued companies and the index imposes strict rules, guidelines, and requirements in order for those companies to maintain their membership.

What does index trading entail?

Index trading, also known as indices trading or share index trading entails the buying and selling of a specific stock market index. Online traders and investors will typically speculate on whether the price of an index is going to rise or fall and based on their findings, will decide whether to buy or sell.

Due to the fact that an index is representative of an entire group of stocks, you won’t be purchasing any underlying stock, but instead you’ll be estimating the performance and thus buying what you think the average performance will be.

If the share prices of the companies that make up for the index goes up, then so too does the index itself, and vice versa. Trading indices online means you’ll confront two key types: index cash CFDs (Contracts for Difference) and index futures CFDs.

The major difference you need to be aware of is as follows: the cash market does not have an expiry date whereas the futures does, and this is typically referred to as a ‘rollover’. To be more precise, a futures contract is ultimately an agreement between both buyer and seller regarding the price that will have to be paid by the buyer at specific date in the future.

What are the hot share indexes of the world

Each country that has a stock market or a securities exchange forms part of the global system of financial markets. All participating countries will have share indexes which themselves are made up of popular companies such as Tesla, IBM, Coca-Cola, Apple, or AstraZeneca, which can be found on the FTSE and London Stock Exchange.

A share index isn’t just something indicative of a group of high-performing companies, it’s also a measurement of the economy of its respective country.

Many index markets are made up of blue-chip stocks, meaning well-established companies with market caps leading into the billions. Here are some of the hottest market indexes in the world along with their countries of origin:

  • ASX 200 (AU)
  • CAC 40 (Fr)
  • Nikkei 225 (JP)
  • Hang Seng (HK)
  • Dow Jones Industrial Average – DJIA (USA)
  • S&P 500 (USA)
  • EURO STOXX 50 (EU)
  • Nasdaq 100 (USA)
  • FTSE 100 (UK)
  • DAX 30 (DE)

Influential factors

External forces play the biggest role in the movement of a share index price. The politics and economics of a country related to the share index will often influence its price. Influential factors to consider are the following:

  • Global news: Natural disasters and pandemics can impact a share index price by negatively impacting upon its country of origin.
  • Economic news: Economic events and/or meetings such as trade agreements or central bank rate decisions.
  • Index reshuffle: If a company is added or removed from a share index, the price of the index will be affected.

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