Trading Indices

An index is a form of asset composed by many shares of the same industry sector, geographical region or political conditions. They are used as economic performance indicators. Most of the highly developed countries, and developing ones have at least one index. For example, the S&P 500 is made of 500 top-traded american companies. It comprises 70% of the overall stock value of the US market. It is like a scanner of the American economic health.

The major factors which influence indices price movement:

• Financial reports and economic predictions;
• Political events, trade wars and acts of terrorism;
• National and international political decisions/ events;
• Natural, unpredicted disasters.
Why are indices good for your portfolio?

Index trading is considered more safe and secure than the other form of assets in the financial markets. The risk is diversified inside of the index, and it is considered to be lower than forex, digital currencies or stocks trading.

• The least manipulative financial asset;
• Diversity of assets, not all your eggs into one eggs;
• Lower risks levels;
• No bankruptcy risk;
• Access to the global economy.

What determines the amount of profit?

– The value of capital invested

– The size of the leverage you choose.

– Commission to open the deal

– Commission to transfer the deal to the next day

– The opening and closing price difference

How are major indexes calculated?

Before the digital era, indices used to be calculated as simple averages. The prices of all the participants were summed and divided by the number of companies. Today, this seems to be very simple, so other methods are being used. Indices’ values still change related to the price movements of their compounded stocks, but their value is calculated in two other methods.

Market-value-weighted indices
Market-weighted, or as it is known differently capitalisation-weighted, is a method of calculating the market value of the indices based on the total market value of its constituents. As a consequence, bigger companies have a larger impact on the index it belongs to. Market-weighted indices are FTSE 100 and DAX 30.

Price-weighted indices
Price-weighted indices take into consideration the stock price of its constituents. As a consequence, companies with higher stock prices have a bigger impact on the overall index value. The Dow Jones Industrial Average is a great example of the price-weighted indices. 

What are the best Indices to trade?

An index is a measurement of an industry section. There are many options for how the index value is calculated, the most used is the weighted average. Indices are used as a tool to measure the performance of a certain market, industry sector or economy. An index structure is always clear and transparent. This is the main reason why experienced investors are always investing their capital in tech, finance, pharmaceutical or other indices categories.

S&P 500
The Standard & Poor’s 500, also known as the S&P 500, is the American stock market index of the biggest 500 companies listed on the New York Stock Exchange. It differs from other stock markets due to its composition and the method of weighting calculations.
It stays among the most traded indices and it is considered one of the most powerful performance indicators of the US economy. It represents about 80% of the american stock markets.

DAX 30
The Dax index is a German stock index that is compounded by the 30 biggest German companies listed in the Frankfurt Stock Exchange. It represents nearly 75% of the Frankfurt Stock Exchange, so it can be used as an indicator for the overall German economy. When compared to other indices like the UK or the US indices, DAX30 is more volatile, and can be traded through CFDs, meaning that traders can open both, long and short positions.

Nasdaq 100
The Nasdaq 100 is made up of 103 equities issued by the 100 largest tech companies listed on the Nasdaq stock exchange. The index is based on the companies market capitalization, with some significant restrictions which limit the influence of the largest companies. 

Multiplier (Leverage)

A leverage multiplies your invested capital, growing your trading exposure in the market. The leverage shows how many times the volume he invested will increase.

Let’s suppose you invest $250 applying a 1:100 leverage. The total trading volume will be $25,000 ($250 * 100 = $25,000).

Keep in mind that the leverage increases both, potential profits and risk level.

A high leverage is suitable for active traders who open and close their trades during the day, meanwhile, for long-term investors, using smaller leverage would be a smarter and safer choice.

The leverage values vary in different types of assets. The larger leverage scopes can be applied while trading currency pairs, and smaller ones while trading digital currencies.