The Beginner’s Guide To Trading Indices
An index is a collection of selected stocks that investors can trade as a unit, allowing them to enhance and balance their market exposure. Learn More.
*Sage FX would like to state that traders should research extensively before following any information given hereby. Any assumptions made in this article are provided solely for entertainment purposes and not for traders to guide or alter their positions. Please read our Terms & Conditions and Risk Disclosure for more information.
- What are Indices?
- What Influences Stock Indices?
- Why Trade Stock Indices?
- Disadvantages of Trading Indices
- Trading Indices With Sage FX
FTSE, Dow Jones, Nasdaq…
Even if you haven’t the slightest clue what a stock index is, you’ll almost certainly have heard these terms thrown around in business news. In actual fact, indices offer an easy and useful opportunity to strengthen your portfolio, so even if you’re a trading beginner, they’re definitely worth consideration.
What are Indices?
In a nutshell, an index is a collection of selected company stocks that traders and investors treat as a single unit. Instead of trading across multiple stocks and managing simultaneous orders, you can choose a single index to instantly spread your market exposure.
The value of indices is determined according to a weighted average formula. This means the value of individual stocks is averaged according to their capitalization or market prominence. As each stock exchange and country has a benchmark stock index, economists, politicians, and analysts will frequently use indices to gauge the performance of the underlying economy.
However, the structure of indices varies. Some are country-specific, such as the German DAX 30 or the Japanese Nikkei 225. Others are regional, such as EURO STOXX 50. And some are dedicated to companies within a specific sector, such as the tech-focused Nasdaq-100.
What Influences Indices?
Because indices comprise of stocks, traders should approach these assets from a similar angle in terms of fundamentals. Firstly, political climate can influence an index’s values through trade tariffs, business policy, government spending, or quantitative easing. Additionally, socio-economic data such as consumer spending, employment, central bank announcements, and inflation tend to send ripples through the stock market.
Secondly, the performance of individual companies and specific industries can affect index value. Although indices provide an average of individual companies’ performances, the larger stocks of an index can still have a weighted influence on the overall value. As a result, it is worth keeping up to date with the bigger players of your chosen index and the industries they represent.
Why Trade Stock Indices?
The problem with trading stocks is that it requires significant effort to research and follow your chosen companies. Conversely, indices offer an instant and effortless route to diversifying your portfolio across multiple assets. Through a single trade order you spread your risk and gain exposure to tens or even hundreds of different companies!
As well as being accessible to traders of any level, indices have a reputation for being relatively safe in terms of volatility. Due to their composite nature, there is less likelihood of sudden price changes or manipulations (both of which are endemic in commodities or crypto!). Moreover, CFDs allow traders to enjoy these assets with flexibility; leverage can be applied to amplify trades, and both long and short order options are available at any time.
Disadvantages of Trading Indices
As with every asset class, trading indices has some disadvantages. Whilst low volatility might be welcomed by beginner (or cautious) traders, it does not offer the same opportunities for fast profits as other asset classes. Further, indices are often less liquid than other assets, such as forex, and are limited to local trading hours. The forex market, meanwhile, is open 24/5.
Nevertheless, if you utilize indices alongside your other favourite assets, they can certainly add a unique strength to your overall portfolio.
Trading Indices with Sage FX
Now that you understand indices, it’s time to make your choice! Fortunately, Sage FX offers a range of the top stock indices in the global markets. Below we’ve listed the indices on offer, including some of their notable stocks:
- ESP35 – Spain’s IBEX 35: Santander, BBVA, Aena.
- EUSTX50 – EURO STOXX 50: Adidas, Airbus, BMW, and Volkswagen.
- FRA40 – Frances’ CAC 40 : BNP Paribas, Carrefour, Renault, and Total.
- DAX – Germany’s DAX 30: Bayer, Deutsche Bank, E.ON, Siemens.
- NAS100 – Nasdaq-100: Apple, Meta, Netflix, Starbucks, Tesla.
- SPX500 – US S&P (Standard and Poor’s) 500: Amazon, Domino’s Pizza, Ford, JPMorgan Chase, McDonald’s, Microsoft, Visa.
- UK100 – UK FTSE (Financial Times Stock Exchange) 100: AstraZeneca, BP, GlaxoSmithKline, Tesco, Unilever
- US30 – US DJIA (Dow Jones Industrial Average): Coca-Cola, IBM, Nike, Walmart, Disney.