What Is Indices And How Can We Trade Them?
Everything you wonder about the indices, which measure the proportional change of investment instruments by collecting data such as price, cost, sales, production, is in our article.
Table of Contents
What Is Indices?
What are the World's Major Stock Indices?
What Is The Most Popular Stock Market Index?
What Are the Factors Affecting Stock Market Index Prices?
How Are Indices Compiled?
Index trading is a popular way for investors to gain exposure to the financial markets without having to research and invest in company stocks directly. Trading stock indices is one way to reduce risk in stock trading. Instead of buying and selling individual company stocks, you trade an index or a compilation of stocks.
What are the World's Major Stock Indices?
The stock market indices with the highest trading volume in the world market; It creates indices such as Dow Jones 30, Nasdaq 100, S&P 500. FTSE 100, DAX 30.
-Dow Jones 30 Index; Also known as the Dow Jones Industrial Average, it is a weighted average of the 30 companies with the highest market capitalization, traded on both the New York Stock Exchange and the Nasdaq.
-Nasdaq 100 Index; It is also known as the technology index and consists of the stocks of the 100 companies with the highest market value, traded on the Nasdaq Stock Exchange, one of the largest stock exchanges in the USA.
-S&P 500 Index; It is an index organized by Standard & Poor's and covers the stocks of the 500 largest companies in the USA.
-FTSE 100 Index; It is an index consisting of the stocks of 100 British companies with the highest market value traded on the London Stock Exchange.
-DAX 30 Index; It is an index that measures the performance of the 30 companies with the highest market value in Germany, traded on the Frankfurt Stock Exchange.
What Is The Most Popular Stock Market Index?
The stock market index with the highest average trading volume is the NASDAQ–100. The Invesco QQQ ETF (QQQ) index tracks has become one of the largest ETFs in the world.
Between 2009 and 2019, the NASDAQ-100 earned 372% on a price basis, with an overall return of 430% including dividends. However, as always, it is crucial to remember that past performance is no guarantee of future returns.
What Are the Factors Affecting Stock Market Index Prices?
Stock index prices fluctuate according to the share prices of the founding companies. For indices that are weighted averages, the performance of the largest components exerts more influence.
Interest rates set by central banks such as the US Federal Reserve, the Bank of England and the European Central Bank affect the broad performance of stock markets. Expansionary monetary policy, including lower interest rates and asset purchases, tends to boost equity markets, while rising interest rates tend to put pressure on stock markets. Weighted indices for companies that generate most of their income abroad can also be affected by exchange rates. For example, the FTSE 100 includes companies that have taken advantage of the weakness in sterling value in recent years as they have higher revenues when converting foreign currency sales revenues to sterling.
Elections and other political events can affect stock market performance. The US presidential election is having an impact on international markets, as investors ponder the impact of an incoming administration's policies on possibly the world's largest economy.
The UK's exit from the European Union (EU) has had a strong impact on the FTSE 100 and European stock indices since the Brexit referendum in 2016, and sentiment about the possibility of the two sides reaching a deal has added to volatility. As we continue to negotiate the details of a trade deal and the UK's exit deal, there is still uncertainty about the long-term relationship between the two sides.
How Are The Main Indices Calculated?
Initial indices were calculated as simple averages. The share prices of all components were added up and divided by the number of companies. However, today some important indices such as the NASDAQ-100 and Hang Seng are weighted averages. The two main formulas used to calculate the value of a weighted index are value-weighted and price-weighted.
Market value weighted indices
Market-weighted indices are calculated over the total market value of the founding companies. This means that the largest companies have the most influence on the value of the index.
The market capitalization of each company is calculated based on publicly traded stocks for trading. A company's publicly traded market value is less than its total market value, as it does not include shares held by the company's insiders. Ftse 100 and DAX 30 are examples of weighted indexes with market value.
Price-weighted indices
Price-weighted indices are calculated over the share price of the founding stocks. This means that companies with the highest share prices have a stronger influence on the value of the index. Price-weighted indices are less common than market cap-based ones. The Dow Jones Industrial Average is the best-known example of a price-weighted index.
How Are Indices Compiled?
The indices are administered by committees that determine the criteria that company shares must meet to be eligible for inclusion. These committees meet regularly to review index rules and make decisions on whether to exclude companies. Some committees conduct quarterly reviews, while others prefer annual reviews. Some committees remove stocks that no longer meet eligibility criteria, while others allow them to stay or give them time to return to eligibility.
How to Trade Indices?
Stock indices trading is a way for individual investors to gain exposure to global or regional markets without having to spend time analyzing the financial statements of large numbers of individual companies. It also reduces the risk of exposing your portfolios to underperformance or bankruptcy of individual companies.
Popular stock indices offer traders high levels of liquidity and tight bid and sell margins, making it easy to enter and exit positions. Investors can trade indices through mutual funds that manage the process on their behalf:
- Passive funds, also known as follower funds, hold stocks at the same rate as the index to match its performance.
- Active funds are managed by fund managers who aim to outperform the index.
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