For investors, an index is a measure of the performance of the price of stocks, bonds, or other tradable assets in the wider securities market. When you hear newscasters talk about the ups and downs of “the Dow,” they are talking about how well a specific index — the Dow Jones Industrial Average — performed that day. Experienced traders are aware of the main US, European, and Asian stock indexes and while most traders have likely heard of or monitor these indexes, many new traders don't know how the stock indexes are traded. In this article, you will learn what is a stock index and how is traded.
A stock index is a compilation of stocks constructed in such a manner to track a particular market, sector, commodity, currency, bond, or another asset. For example, the NDX is an index that tracks the largest 100 non-financial companies listed on the NASDAQ.
The SET50 and SET100 Indices are the primary stock indices of Thailand. The constituents of both lists are companies listed on the Stock Exchange of Thailand (SET).
Or, for example, a technology stock index will contain several or all technology stocks. The index then moves with the overall performance of the stocks that it holds within it. This index can then be quickly used to monitor how technology stocks are performing currently and over time.
Indexes are popular because they provide information for a basket of stocks, and not just one. Therefore, they are a good analysis tool, as well as a good trading tool as we'll see in the next sections.
DJ30 - Dow Jones Industrial Average
The DJIA index comprises 30 companies: 3M, American Express, Apple, Caterpillar, Chevron, Cisco, Coca-Cola, DuPont, Exxon Mobil, General Electric, Goldman Sachs, JPMorgan Chase, Johnson & Johnson, McDonald's, Merck, Microsoft, Nike, Pfizer, Procter & Gamble, Travelers, UnitedHealth Group, United Technologies Corporation, Verizon, Visa, Walmart, and Walt Disney.
SP500 - Standard and Poor's Index
The S&P 500 measures the performance of 500 large companies listed on US stock exchanges. Some of these include 3M, Adobe Systems, Alphabet, Amazon.com, American Express, Berkshire Hathaway, Boeing, Citigroup, Coca-Cola, eBay Inc, Exxon, FedEx, General Motors, General Electric, Goldman Sachs, Harley-Davidson, Hewlett Packard, Hilton, Intel, Johnson & Johnson, JPMorgan, Mastercard, McDonald's, Nasdaq, Nike, Oracle, PayPal, PepsiCo, Salesforce, Starbucks, Twitter, Visa, Walmart and more.
NQ100 - Nasdaq stock index
The Nasdaq 100 contains the 100 largest companies in the technology sector in the US. Unsurprisingly, the Nasdaq is one of the global indexes that we hear a lot about, and is highly regarded by stock index traders.
Some stocks represented by the Nasdaq 100 include: Adobe, Advanced Micro Devices, Alphabet Inc., Amazon.com, Amgen, Apple Inc., Autodesk, Cisco, Citrix, Ebay, Expedia, Facebook, Hasbro, Intel, Intuit, Marriott, Micron, Microsoft, NVIDIA , Netflix, Tesla, Workday, and more.
Some of the most popular European stock indices include the FTSE100 in the UK, the DAX in Germany, the CAC 40 in France and the Stoxx50, which represents a range of companies across the Eurozone.
The UK stock index - FTSE 100
The London Stock Exchange, one of the most popular stock exchanges in the world, also has its own stock index - the FTSE100. The FTSE (or Footsie) represents 100 companies from the London Stock Exchange, including 3i, AstraZeneca, Aviva, BAE Systems, Barclays, BHP, BP, British American Tobacco, BUNZL, Diageo, easyJet, Experian, GlaxoSmithKline, Glencore, HSBC, Just Eat, Lloyds Banking Group, Prudential, Reckitt Benckiser, Rio Tinto, Rolls-Royce Holdings, Royal Bank of Scotland, Royal Dutch Shell, Tesco, Unilever, Vodafone Group, and so on.
The German stock index - DAX 30
The DAX is an index composed of the 30 largest companies on the Frankfurt Stock Exchange, based on their market capitalisation and volume order books. The index is managed by Deutsche Borse and prices have been calculated every second since January 1, 2006 by the electronic system Xetra.
Given that Germany is Europe's largest economy, the DAX30 is a very popular index for international traders.
The companies represented by the DAX index include: Adidas, Allianz, BASF, Bayer, BMW, Comerzbank, Deutsche Bank, Deutsche Telekom , Fresenius, Henkel, Infineon, Linde, Lufthansa, MAN, Metro, RWE, SAP, Siemens, VW , and more.
The French stock index - CAC 40
The CAC 40 is the main stock index of the Paris market place and was established on June 15, 1988. The CAC 40 index is determined from the prices of the 40 companies with the largest market capitalisations listed on the Paris Stock Exchange.
Since December 1, 2003, the CAC 40 has adopted the floating market capitalisation system to align with the way in which major global indices operate. This means that since that date, the number of securities available for purchase on the market for a company is taken into account in calculating the index.
Some of the companies listed on the CAC 40 index include: Accor, Air Liquide, Airbus, ArcelorMittal, AXA, BNP Paribas, Capgemini, Carrefour, Danone, L'Oréal, LafargeHolcim, LVMH, Michelin, PSA, Renault, Sanofi , Sodexo, Total, and more.
The Eurozone stock index - STOXX 50
Finally, if you're interested in trading the Eurozone economy as a whole, there is an index you can use!
Euronext is the main stock exchange in the European area, and the Euronext stock index (the Euro Stoxx 50 index), includes 50 companies from the European area, based on their market capitalisation.
Other European indices
While we've listed the most popular European stock indices above, there are a number of other European stock indexes. Here is a short list of them:
Asia-Pacific stock indices
While we often talk about the Paris Stock Exchange, the London Stock Exchange or the New York Stock Exchange, what about Asian stock exchanges?
Let's look at these in more detail now.
Asian and Australian stock indices often aren't as popular with UK and US traders due to the different time zones in which these indices operate. However, for those who are open to unusual trading hours, or who are trading around a day job, they can provide some interesting opportunities.
The Japanese stock index - Nikkei 225
The Nikkei Stock Exchange Index, also known as the Tokyo Stock Exchange Index, consists of 225 companies and is the most important stock exchange index on the Japanese stock exchange.
Companies represented by the index include Canon, Casio, FujiFilm, Fujitsu, Honda, Mazda, Nikon, Nissan, Panasonic, Sapporo, Subaru, Suzuki, Toyota, Yahoo, Yamaha and more.
Chinese stock indices - the SSE Composite Index, and the CSI 30
When looking at Chinese markets, we should mention the Chinese index: the SSE Composite Index. The SSE Composite Index is the most widely used stock index in China, reflecting the performance of the Shanghai stock exchange.
Another Chinese stock index is the CSI 300. The CSI 300 is the Shanghai stock market index of the country's 300 largest companies by market capitalisation.
These stock indices are sometimes referred to together as the Beijing stock index, referring to the country's capital, although the country's stock exchange is located in Shanghai.
A third Chinese stock market index the FTSE China 50, features 50 companies chosen from the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
The Hong Kong stock index - HSI50
Another popular Asian stock index is the Hong Kong HSI50 index. The Hong Kong stock market index comprises the country's 50 largest companies by market capitalisation.
The Australian stock index - the ASX 200
The S&P/ASX 200 represents Australia's 200 largest companies by market capitalisation. These companies account for 82% of Australia's share market capitalisation, meaning the ASX is one way you can trade on the state of the Australian market.
Companies listed in the ASX 200 include: ANZ Banking Group, Blackmores, Commonwealth Bank, Coca-Cola Amatil, Caltex Australia, Domino Pizza, National Australia Bank, Qantas Airways, Telstra Corporation, Virgin Money, Westpac Banking Corp, Woolworths, Xero and more.
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Indexes are designed to track a particular market or asset. The stocks in an index are collected in what’s known as a basket. For example, if you wanted to invest in the Dow Jones Industrial Average Index (DIJA), you would purchase shares of the 30 stocks in the index basket. You would actually own shares of 30 different companies.
Index-weighting is how the shares in an index basket are allocated; basically how the index is designed. For example, a price-weighted index has different amounts of shares for each stock based on price. A stock worth $20 would have 1 share, where a stock worth $5 would have 4 shares to make it equal to the $20 stock.
Another type of weighting is based on market capitalization. The shares of each stock in a cap-weighted index are based on the market value of the outstanding shares. There are also revenue-weighted indexes, fundamentally-weighted indexes, and even float-adjusted indexes.
Indexes are a nice way to gain exposure to certain markets or sectors without having to corner the market in stocks. You can gain exposure to the overall performance of a market or sector or subsector by buying the appropriate index basket.
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The stock indexes cannot be traded directly, and are available for information only (as a way to track the performance of a group of stocks). Market data is available for the stock indexes, and they can be charted like any other market, but there is no way to make either a long or short trade on the actual stock indexes. But other financial products, like index funds and contracts for difference (CFDs), can be used to trade the movements of stock indexes.
Using CFDs to trade indices will allow you to go long or short the market without having to deal with conventional exchanges. You trade direct with your CFD broker. No matter whether you have a positive or negative view of the index forecast and predictions, you can try to profit from either the upward or downward future price movements.
Made up of a wide cross-section of liquid trading instruments, indices are extremely popular with CFD traders around the world.
With an increasing number of traders choosing CFDs as their favorite financial instrument to trade the global financial markets, let’s take a look at the benefits of CFDs, as opposed to traditional investing.
If you are familiar with traditional investing, you will know that traders are limited in their ability to profit from their predictions in the sense that you cannot sell a share that you have not bought before. That’s where CFDs come into play. CFDs allow traders to profit both on rising and falling price movements, simply because with CFDs you do not essentially own the underlying market.
The second clear benefit of CFDs is the opportunity to trade on margin, also known as leverage. This means, that if a trader wants to control a position on DAX worth £2,000 and the margin requirement of the broker is 5%, then he will only need £100 to open the trade. It is important to note here that in a profitable scenario, profits are calculated on the full-size position. However, losses follow the same calculation too. That’s why traders should use caution when trading on margin.
One of the most popular ways to use CFDs is for hedging positions. Let’s suppose that you have bought a share, the price is pushing lower and your profit and loss is in red territory. In this scenario, opening a short CFD position on the share allows you to limit your losses, as the short position will be gaining value should the market continue moving lower.
Structuring the size of your position according to your risk profile is key for long-term profitability in trading. For that reason, when starting with CFDs it is important to choose a broker who offers variable contract sizes. In that way, less experienced traders can begin with mini contracts and lower exposure to the markets, whereas seasoned traders can still trade in larger volumes.
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CFDs were initially designed for shares trading. With their popularity growing over the years, CFDs are now used to trade a wide range of markets including indices, energies, forex, commodities and even cryptocurrencies lateley. In CFD trading, there are two prices: the buy and the sell price. The difference between the two is called the spread. By trading at the buy price, you will profit if the asset’s value increases. By trading at the sell price, you will profit if the asset’s value decreases. Let’s take a look at some trading examples to find out how CFD trading works in practice.
Let’s suppose that market rumors for the German banking sector suggest that the DAX is about to take a hitting. For that reason, you decide to go short (sell) 5 contracts of DAX30 at the price of 13,050, which equals to €5 per point movement.
Your prediction proves to be right and the market pushes lower to 12,946. You decide to exit the trade and secure your gains. The total profit is (13,050 – 12,946) x €5 = €520.
Despite the rumors, the market keeps pushing higher above 13,100. At this point, you decide to close the position at 13,089 in order to avoid bigger losses. The total loss is (13,123 – 13,050) x €5 = €-365.
Now let’s take a look at how a long trade would look like. The S&P500 is trading at 2,601, your technical analysis gives you a buy signal and you decide to go long 3 contracts. In this market, 3 contracts equal to $30 for each point movement.
Five minutes before market close, the market price has moved higher to 2,619 and you decide to materialize your profit, rather than risk an overnight move against you. Your total profit is (2,619 – 2,601) x $30 = $540.
During the US session, some unexpected breaking news pushes the index lower and the market price is now at 2,588. You decide to cut your losses and exit the trade. Your final loss is (2,601 – 2,588) x $30 = $-390.
Although the profit and loss are calculated in the currency of the asset class, there is no reason to worry. An AM Broker account automatically calculates your profit and loss into your account’s currency in real-time based on the exchange rate.
An index fund is a type of mutual fund whose holdings match or track a particular market index. It’s hands-off, and you could build a diversified portfolio earning solid returns using mostly this type of investment.
That’s because index funds don’t try to beat the market, or earn higher returns compared with market averages. Instead, these funds try to be the market — buying stocks of every firm listed on an index to mirror the performance of the index as a whole.
Index funds can help balance the risk in an investor’s portfolio, as market swings tend to be less volatile across an index compared with individual stocks.
Benefits of trading Index Funds:
Top Index Funds to Buy:
Understanding how stock indexes work is important, but if you need some help MetaTrader 5 AM Broker provides access to the most popular stock indexes in the world through CFDs and ETFs, with ZERO commission and lowest spreads.