What are Indices?

What are Indices?

So What are Indices – A Stock market index can be defined as a measurement of the performance of a group of stocks in a specific sector or sectors. Indices are essentially a tracking tool to measure the underlying stock market.

Stock market indices are a great way to keep track of a country’s economy. For example, if you follow the SnP500 – Then you will have a good understanding of how the US economy is performing. The same goes for the FTSE in the United Kingdom.

Indices are also a great way to provide a benchmark against individual stocks, the overall stock-market and other assets and investments.

Trades and investments that aim to beat the indices are usually considered ‘Active’ whereas investments and trades that try to replicate or stay in line with the benchmark are said to be ‘Passive’.

In this article, we are going to take a look at the largest stock market indexes around the globe. And also look at 5 of the largest indices a bit closer so you have a better understanding of which companies are included within the indices.

Once you’re ready and you’ve finished our ‘What are Indices’ piece – Please click here to open your trading account.

What are Indices: Trading Indices

There are many ways you can gain exposure to stock market indices. Let’s take a look at a few different options:

• Trade the individual stocks
• Place a Spread-Bet
• Place a CFD trade
• Trade index futures
• Trade the cash instrument
• Invest in an ETF

These are just some of the vehicles/options that you can use. We are going to take a closer look at a few of these options below, starting with a CFD trade.

What are Indices – CFD Vs SB

When trading an index as a CFD, you don’t own anything physical. You won’t own the shares etc.

You are just trading the price of the underlying contract and you benefit if you sell above where you bought or buy below where you sold. i.e., you can go Long or Short a stock market index.

An index trade placed as a spread-bet is very similar to a CFD trade – again, you won’t own anything and you are just trading on the price movements.

The main difference between the CFD and the spread-bet will usually be how the trade is placed (£ per point for SB Vs Lots for CFD) and the potential tax benefits of spread-betting.

What are Indices– Cash or Futures

When you first log in to your trading account and reveal all markets available to trade (If using MT4 this is done via the ‘show all’ option when you right click any market in the market watch box) you may notice you have 2 different options for each index.

This is usually the cash option and a futures option (Although please check with your broker)

Futures symbol codes will usually have the month you are trading after the name of the symbol. And cash symbols may have the word ‘cash’ as a suffix or the name may differ slightly.

Important – Before you start trading on your account, it’s important that you know the difference between a cash contract and a futures contract. Ensure you are aware of each of the symbols that are being offered to trade are.

Most brokers will have a MIS or market information sheet (Or something similar) that details all the contract specifications of each contract. Ensure you familiarise yourself with this document.

What are Indices: So, what’s the difference between a cash index and a futures index?

For the everyday trader, there’s not going to be too much difference. A lot of retail traders open and close their position on the same day and usually trade via SB or CFDs so they will notice next to zero impact.

The cash market is the market in which the purchase of the product is settled immediately.

This is often referred to as “spot”. – as the transaction has been settled on the spot.

With a futures market, the buyer of the contract will agree a price to buy the product at a pre-agreed price in the future.

What are Indices: Global Stock Market Indices

Here we have a look at some of the largest Indices around the world, broken down by Geographic location:

Of these Indices – we have selected the 5 most commonly traded Indices. We are going to take a look at the constituent companies that make up these Indices:

What are Indices: 1 – Dow Jones (or Dow Jones Industrial Average)

The Dow Jones Industrial Average index is one of the most widely recognised stock market exchanges in the world. It consists of some of the top 30 US companies. These companies are traded on the NASDAQ exchange as well as on the NYSE (New York Stock Exchange)

Here is the current list of DOW 30 stocks (correct at time of writing):

Take a look at some recent price action of the Dow below:

What are Indices: 2 – S&P 500

The SnP is said to provide a much better insight on the state of the US economy than the Dow Jones. This is simply because of the sheer number of companies that the SnP500 covers. Obviously 500 Vs the Dows’ 30. This is what makes it one of the most commonly followed and traded stock market indices available.

Type SnP500 constituents into google and you will find an extensive list of all the SNP firms. However, here’s a snippet of the top 10 companies included:

Take a look at some recent price action of the SnP500 below:

What are Indices: 3 – NASDAQ (Nasdaq Composite)

The Nasdaq composite index is enormous – covering thousands of stocks, including those of the Dow and S&P500. Because of the large amount of technology stocks covered by the Nasdaq, investors and traders largely refer to it as the ‘Technology Index’.

Here are 10 of the largest stocks listed on the Nasdaq:

Take a look at some recent price action of the Nasdaq below:

What are Indices: 4 – DAX (Dax performance index)

The DAX30 includes 30 large companies that are traded on the Frankfurt stock exchange. It is essentially the UK FTSE or the US Dow in comparison – because of the limited number of companies it covers. In 2021 the DAX30 will become the DAX40 by adding a further 10 stocks to the constituents list.

Here is a list of the current DAX30 constituents:

Take a look at some recent price action of the Dax below:

What are Indices: 5 – FTSE100

Finally, we have the FTSE – The Financial Time Stock Exchange 100. And the 100 referred to the number of companies it covers. This is the wider known FTSE index but there are plenty more than span across further stocks and sectors, for example the FTSE250 and FTSE350. The shares on these Indices are traded on the London Stock Exchange.

Here are the current 30 biggest constituents of the FTSE100:

Take a look at some recent price action of the FTSE below:

Ready to tackle the FTSE, the DOW or the SnP500??? Click here to open your trading account and explore the world of Stock Market Indices today!