What are Indices?
Indices in different concepts
Indices are the plural form of index and have several definitions, depending on the context the word is used in. When referring to financial markets and trading, indices relate to the price performance of an asset, sub-asset or a group of shares. Indexes are directly related to the stock market and the performance of shares listed on that market.
Definition of Indices
Breaking it down even further, an index can be defined as a portfolio of stocks listed on a stock market. Most major economies, or developed countries, have at least one stock exchange or financial index. The Australian Stock Exchange, the Dow Jones and the London FTSE are all examples of indexes. If most stocks rise, then, generally speaking, the overall value of an index will also rise.
Big companies influence the performance of an index more
Companies with a higher share price or market-cap value influence the performance of an index more than smaller company stocks. This is because the performance of some indexes are based on the capitalisation weight of a stock. This is known as a cap-weighted index or market-value weighted index. For example, if shares in the ‘big’ banks decline, it’s likely the overall index will go down because of how heavily-weighted (valuable) bank stocks are.
An index – used to describe and compare financial markets
An index can also be used by traders and investors to describe and compare financial markets. The term “bull market” is used when an index is rising, or expected to rise, and is controlled by buyers. The term “bear market” is the opposite of a bull market and defined by a downward trend in the index value, controlled by sellers. The value and movement of an index is generally described in points or a percentage. For example, the Dow Jones could rise 100 points or 0.6% in a trading session, to a total value of 24,000 points.
Sector / Industry Indices
Publicly-listed companies are categorised into groups or assigned an industry classification, also known as sector indexes. On the Australian Stock Exchange, there are 11 sector indices including financials (banks), materials (miners) and health care stocks. Each sector is weighted differently, depending on the number of companies within that sector and the value of those companies.
Some indices can have a large focus on just one industry or market. The NASDAQ in the United States is popular for its major technology stocks such as Facebook, Amazon, Apple, Netflix and Google (commonly known as the FAANG stocks). Not all companies on the NASDAQ are technology-based. However, because the index is home to some of the world’s biggest tech companies, the performance of the NASDAQ is considered a leading indicator of the technology industry.
Why Trade Indices?
Hundreds of companies can be listed on any one index or stock exchange at a time. Instead of investing in shares through a stock-broker and being stock-specific, traders can choose to invest or wager on the performance of an index. This can be done by using a financial instrument that replicates the price performance of indexes. By doing this, traders are trading a financial derivative rather than a physical asset.
Benefits of Trading Indices
There are several benefits to trading indexes over stock-specific trading. This includes exposure to an overall market instead of an individual stock. This means your investment is based on the indices’ most actively-traded shares.
Indexes can also be traded long or short depending on the trader’s position and view of the index, whereas not all shares and/or stocks can be traded short. Indices are also traded on margin, meaning traders only need to invest a small percentage of the index value and can leverage their investment to enter larger trades.
Another benefit of trading indices over shares is longer trading hours made available through platforms like Meta Trader 4 and Meta Trader 5. Longer trading hours mean indexes, including international markets, can be available to traders at any time, while in different time zones.
Trade Indices with Eightcap
The Dow Jones Industrial Average, or more commonly known as the Dow, is represented as ‘US30’ when trading CFD Indices. The Dow is a price-weighted index consisting of the United State’s 30 most valuable stocks on the New York Stock Exchange and the Nasdaq. Goldman Sachs, American Express, Apple, Microsoft and McDonald’s are a few of the big names listed on the Dow.
The S&P 500 Index or simply the S&P is one of the world’s most widely quoted indexes and is represented as ‘SPX500’ when trading its value as a CFD. As the index name suggests, the S&P is a basket of 500 large-cap companies from a range of sectors and industries.
Displayed as the CFD ‘JPN225’, the Japanese Nikkei is the oldest stock index in Asia. Trading on the Tokyo Stock Exchange, the index is made up of Japan’s top 225 blue-chip companies. This includes technology companies Sony and Panasonic, and car manufacturers Nissan and Mazda.
The Australian Securities Exchange, known as the ASX 200, can be traded as a CFD symbolised as ‘AUS200’ on Meta Trader. The ASX is Australia’s benchmark trading index comprising of the nation’s largest 200 companies. The index includes 11 industry sectors but is primarily dominated by the two largest sectors; the banks and the miners.
The Financial Times Stock Exchange 100 index, commonly referred to as the London FTSE, is the United Kingdom’s most used stock market indicator. The FTSE (pronounced Footsie) launched in 1984. It is made up of the U.K.’s top 100 companies with the highest market capitalisation. The index is seen as ‘UK100’ when trading it as a CFD on MetaTrader.
Europe is home to several indexes, including the CAC 40 in France, the DAX in Germany and the Euro Stoxx; a blue-chip index for the Eurozone, representing 50 major companies in the region. Eightcap provides clients with access to all three.
Read our forex guide to learn what FX is and how to trade it.