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What is Indices Trading

Indices trading is how investors gain exposure to financial markets without the research and without investing in company stocks directly

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What is Indices Trading

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  1. WhatisIndicesTrading? • Indices trading is how investors gain exposure to financial markets without the research and without investing in company stocks directly. With stock market indices, you reduce the risk of stock trading. Insteadofbuyingand sellingacompany'sshares,youtrade acompilationofshares,calledanindex. • WhatisanIndex? • A stock indexstatistically measures theperformance ofagroupofstocksorrelatedstocks. Anindexprice is usuallycalculatedfromtheaverageperformanceof individual stocks thatform thatindex. • Indexeslist thecriteriaacompanymustmeet toqualifyforthe index.Anindex reflectshow abroad industrysectorisdoingor howacountry'sstockmarketasawhole isdoingbytrackingtheperformance ofalargegroupofshares. • Thesurge inan index'spricemeans thata considerablenumberofconstituentstockshaveincreased in valuecomparedto fewerstocksthathaveplummeted. • Indices reflect howtheoverall stockmarketis doing.Onecan determine theeconomy'shealthora particularindustrysectorbylookingatthemovement ina relatedindex'svalue. • Therearesevencommonindicestypes: • Global • Regional • National • Exchange • Industry • Currency • Sentiment-based • Anygivenmajorfinancial markethasone financialindexattheveryleast.Forinstance, theS&P (US500)isan indexofthe500 largestUScompanies. • TheEuronext100(N100) isanindex of the largeststocksonEurope'sEuronext exchange,consistingof companieslisted inTheNetherlands,Belgium,France,Portugal, andLuxembourg. • Othermajorindicesare: • The UK's FTSE100(UK100) • Germany'sDAX30 (DE30) • HongKong’HangSeng(HK50) • Japan'sNikkei225(J225) • Indices thatare focusedonaparticular industryarepopularamongtraders.Take NASDAQ-100 (US100), forexample;itcomprisesthe leading100high-techcompanystocks intheUS.Itactsasa barometer ofthe UStechsector'sperformance. • Stock market indices are considered indicators of confidence in business, and in the stock market, top companies' performance in a particular market, and economic health and are hence referred to in news reportson financialmarkets and economies.

  2. Politicaleventsandmonetarypolicieslikeinterestratechanges,currencymovements,andinternational tradeaffectthestock markets. WhyTradeIndices? Individualinvestorsusually opttotradeindices intheirinvestingaccountswiththeaimofsaving for retirement. Indicestradingexposes onetoa rangeofcompanies.Itpresentsdiversificationthatevensout the extremesin volatility.Over time,some companysharesfall,and somerally. Indexvalues movewitheachtradingsession,butthey possess theiraveragevalueunlessa majorevent like amarketcrash or ageopoliticaleventoccurs. Indiceslowertheriskof individualstocks.Forexample,youloseyourinvestment ifyouinvestin companystockand the companydeclaresbankruptcy.Ifoneof thecompanies inanindexdoesso,it can bereplacedbythenextlargest companyoutsidetheindex.Thevalueof the index maydrop temporarily orhavenonoticeable impactbasedonthesizeofthesaidcompanyandtheperformanceofother constituentsin theindex. Onthecontrary,indexinvestinglimitsthe returnsfromahigh-growthcompany.Whileindividualstocks can outperformanindexbylargemultiples,itmultiplies theriskaswell. Howarestockmarket indexprices determined? Stockmarketindexprices move upor downbasedon thecomprisingcompanies'shareprices.The performanceofthelargestconstituenthasmore influencewhen it comes to indicesthatareweighted averages. The broad performance of stock markets also gets affected by interest rates set by central banks. An expansionary monetary policy like lower interest rates and active asset purchases tend to drive stock market rallieswhileincreasedinterestratesweigh onstockmarkets. Thecurrencyexchangerate isanother factorthatcanaffectthevalue ofanindex thatisweightedtowards companiesthatgenerateaconsiderableshareoftheirrevenuesabroad.TaketheFTSE100,forexample; it includesthecompaniesthatbenefitedfromthedropinthevalueofthepoundsterlinginthepast few yearssincetheyreceivedhigher incomewhileconvertingsales revenue inforeigncurrencies intopounds. Elections and other such political events also considerably affect stock market performance. For example, US presidential elections influence international markets since investors consider the impact of the policy changes withanincomingadministrationandits effectsontheworld'slargest economy. Indices tradingcutsdownthevolatilitybut alsolimits yourprofits.Investorsearnprofitsbyspeculating thepricedirection meaning moneycanbe madewithindicesCFDswhetherpricesare risingor falling.

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