How to Trade Indices: Simple Trading Guide

How to Trade Indices: Simple Trading Guide

In this overview, we will discuss stock indices. They are popular instruments that reveal the current situation in the stock market, used by traders and investors for trading in financial markets.

What are indices?

Indices demonstrate the development of the economy: many economists and investors use indices to assess the situation in the economy of a country. If stock indices grow stably, this means that the economy is developing, and the investment climate is good. If stock indices start falling, the economy is in trouble, and buying indices might be dangerous.

How are indices calculated?

However, certain popular indices, such as the Dow Jones Industrial Index (DIJA) use a weighted method of calculation. This makes companies with a higher stock price more important, and changes in their stock price will affect the current price of the index. The list of companies included in the index can be reshuffled from time to time.

Popular indices

1. Dow Jones (US 30) reflects the weighted stock price of the 30 largest US companies. This is the oldest stock market that has ever been calculated and used for trading.

Dow Jones (US 30)
Dow Jones (US 30)

2. DAX (GER 30) tracks the stock price of the 30 largest joint-stock companies of Germany traded in the Frankfurt Stock Exchange.

DAX (GER 30)
DAX (GER 30)

Be sure to check out How to Trade DAX 30 article.

3. NASDAQ 100 (NAS 100) evaluates the market price of some 100 largest high-tech companies in the USA.

NASDAQ 100 (NAS 100)
NASDAQ 100 (NAS 100)

If you want to find out more about Nasdaq 100 and How to Invest in Indices, make sure to check out this article.

4. FTSE 100 (UK 100) unites the 100 largest companies quoted in the London Stock Exchange.

FTSE 100 (UK 100)
FTSE 100 (UK 100)

5. S&P 500 (US 500) is the so-called “wide market index” that tracks the price of 500 companies with a high capitalization in the USA.

S&P 500 (US 500)
S&P 500 (US 500)

If you’d like to read more about investing in S&P 500, check out this article.

6. Nikkei (Japan 225) is the main stock index of Japan that consists of the 225 largest Japanese companies.

Nikkei (Japan 225)
Nikkei (Japan 225)

For more, check out How to Trade Nikkei 225 article

What does influence the quotations?

  • Macroeconomic events: the general state of the economy, decisions of Central banks about credit and monetary policy, GDP and inflation data, etc.
  • Political events: elections, resignations of governments, speeches of national leaders;
  • Financial performance of the companies: profits and losses of certain companies increase or decrease their stock prices, which might be reflected in the index values;
  • Corporate events: reshuffling of the management, various mergers influence the stock prices, which, again, might cause a positive or negative effect on the stocks;
  • Changes in the contents of the index: the quotations of weighted indices might change if companies are added to or deleted from the index because investors correct their positions with regard to the new list of stocks.

How to trade indices?

For more profound information check out our post about trading indices with strategies.

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By Dmitry Gurkovskiy, Chief Analyst at RoboForex

RoboForex is a brokerage company, which provides traders, who work on financial markets, with access to its proprietary trading platforms.