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Why trade indices

Discover why traders around the world choose indices for their trading success

 

Trading indices – The basics

With indices like DAX and Dow Jones grabbing headlines in the financial world on a daily basis, what is an index exactly and how can traders benefit by adding them into their trading? Let’s start with the basics. An index, also known as stock market index, is the measurement of a compilation of companies and it is used to assess the performance of a sector, a region or a country’s economy.

The first index was created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow in 1885. Before the digital era, the price of an index was calculated with the use of simple averages, i.e. adding up the prices of the constituents companies and dividing it by the number of companies. This might sound over-simplistic in our days, but it did serve the purpose of providing a reliable figure for gauging the strength of the US economy.
 

Market-value-weighted vs. price-weighted indices

Today indices use different formulas to determine their price, which can be divided into two main categories, which is key for traders to understand before evaluating the performance of an index.
 

1. Market-value-weighted indices
Market-weighted indices are calculated based on the total market value of its constituent companies. This means, the bigger the company, the larger the impact it has on the index. This is the most common methodology used by indices, with FTSE and DAX being classic examples.
 
2. Price-weighted indices
This type of indices are calculated based on its companies’ share price. In this case, constituent companies with higher share prices have a bigger impact on the overall index than companies with a lower price.

Top 9 global indices

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Major indices explained

 
  1. UK100

Containing some of the biggest companies regulated by UK company law, it is important to note that not all UK100 companies are based in the UK. The index is calculated in real-time and the prices are published second by second during open market hours. Sector-wise it is focused on energy, financial services, mining, pharmaceutical and oil & gas.

 
  1. GER30

Also known as the DAX stock index, it contains the 30 top German companies based on market capitalization. The DAX is among the most traded indices around the world due to consistently higher volatility and higher daily ranges than other indices.

 
  1. SPX500

The SPX500, also known as the S&P 500, is without doubt the most widely known index in the world. It was created by the publishing firm Standard & Poor’s and includes the top 500 American companies. Due to its strong correlation with other markets, the S&P500 is a popular choice among traders.

 
  1. US 30

The US 30, or most commonly known as the Dow,  is the most recognizable stock index in the world, tracking the stocks of 30 companies in nine core market sectors. A unique feature of this index is that it is a price-weighted average and its movements are used as an indicator to gauge risk sentiment around the world.

 
  1. NASDAQ

The NASDAQ is an American index best known for representing the technology sector. Although it includes a number of other sectors too, names like Apple, Facebook and Google headline its constituents.

 
  1. JPN225

Also known as the Nikkei 225, this is the most popular index in the Tokyo Stock Exchange and a key indicator for the performance of the Japanese economy. Considering that Japan is an export-oriented economy, it is no wonder that Nikkei225 is highly correlated to the US stock markets.

 
  1. AUS200

AUS200, more commonly known as ASX200, is a stock market index that includes 200 of the biggest companies in Australia. It is a capitalization-weighted index, meaning company contributions to the index are based on its total market value.

 
  1. FRA40

FRA 40, also known as CAC, is the benchmark index of the French stock market. Considering that France is one the major economies in Europe, it is widely used to assess the health of Europe as a whole. Some of the most famous constituents include L’Oreal, AXA and Michelin.

 
  1. ESTX50

ESTX50, or Euro Stoxx 50, consist of Europe’s 50 leading companies and is often referred to as the European Dow Jones. This is a market weighted index, with its constituents reviewed on an annual basis every September.


 
 
  • Now that you know the ins and outs of the world’s major indices, it's time to learn

  • How to trade indices






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