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What are Indices

Indices are financial benchmarks that describe how a specific group of stocks is currently performing. Rather than owning stocks in several companies and trading them, you can instead set up contracts that allow you to make financial bets on the performance of entire industries and markets. Famous indices you may already be familiar with include DAX, FTSE 100, and S&P 500.  

Key Points

  • Indices describe how a group of companies is performing over time. This means they can be used to provide an overview of a specific industry or a section of the global economy.
  • Index traders will speculate on future price changes using financial instruments such as CFDs. To do this, they need to understand how a market or industry is performing.
  • A skilled index trader will cite the diverse nature of indices as compared to buying stock in a small number of isolated companies.
  • Indices can be leveraged so that you can hold much larger positions with an initial small stake than you otherwise would be able to

Important Global Indices

Each index is a quantitative description of how a particular market, sector, or industry is performing from an economic and financial point of view. Many major economies around the world have indices that every elite trader will be highly familiar with: 

 

  • S&P 500:  The index that tracks how the 500 biggest U.S. companies are performing based on their share price at that moment.
  • NASDAQ 100: A more specialist index that tracks the 100 largest non-financial companies that are listed on the NASDAQ.
  • FTSE 100: The 100 most highly capitalised companies currently trading on the London Stock Exchange.
  • DAX: A measure of how Germany’s 40 largest publicly listed companies are currently performing.
  • Nikkei 225: Data that describes how the Tokyo Stock Exchange is currently performing. 

A skilled index trader will trade a variety of indices over multiple timeframes, allowing them to diversify their portfolio and derisk their positions. They may also take up positions in specific companies within each index if they feel there is an additional opportunity to make a profit. This is known as stock trading. 

How are Indices Calculated?

Each index is calculated in a different way depending on how it was first defined. For example, the Nikkei 225 is a weighted average of the Tokyo Stock Exchange’s 225 best-performing companies. The composition of the index is reassessed twice a year to ensure it remains economically relevant. Other indices are simple averages of the share price of the companies that make up a specific market sector. Traders will need to know how the indices they trade are calculated to understand how they will be impacted by changes in the market. 

The Power of Indices

Indices give traders and financial analysts the ability to see how a market is performing at a glance and to then profit if they are able to predict its future behaviour. A detailed understanding of how an index is likely to perform gives traders the ability to take out contracts where they can make financial bets on whether its value will rise or fall over a set timeframe. 

Want to Trade Indices?

Reading our new guide on how to trade indices is the next step to take. It will introduce you to the mechanics of taking up new positions and making trades, as well as the key strategies that every index trader needs to know about. 

When you are ready to start placing trades, Eurotrader is a world-leading index trading broker that is tightly regulated at every level. Connecting with our experts will allow you to start trading and taking up leveraged positions.

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