What is index trading and what are the most popular stock indices
What are indices and how can you trade a stock index?
Stock exchanges around the world have a stock index which aggregates a group of the listed companies and acts as a benchmark of its performance. These indices are accurate indicators of the economy as a whole.
Stock exchanges in some countries even have multiple stock indices and traders who want to assess the health of a country’s stock market need only look at how these indices are performing.
For example, in the U.S stock market, the S&P 500 index consists of the top 500 companies by market capitalization while the Nasdaq tracks the performance of the technology sector.
Therefore, there are national indices, regional indices and indices pertaining to a specific sector of the economy as well and forex traders can trade individual stocks and the indices that include them through the trading platform.
Indices can be traded as easily as any other currency pair or financial instrument providing the opportunity to buy (go long) or sell (go short).
The benefits and drawbacks of index trading
While trading indices isn’t necessarily easier or more profitable than any other financial asset class, it presents several benefits for traders who want to get access to the opportunities of the stock market but aren’t sure which individual companies or stocks perform the best.
With a stock index, you can effectively trade on the overall direction of a specific economy, region or sector while also enjoying the unique benefits of diversification. Since an index consists of multiple stocks, even if an individual stock isn’t performing well, it likely won’t have a major impact on the overall value of the index. Therefore, index traders are better protected against risk exposure compared to those who trade individual stocks.
Indices are regulated and established markets that provide increased reliability and transparency to traders and with CM Trading, clients also get access to 50:1 leverage on all available indices and therefore enjoy greater profits with a much smaller initial investment.
However, it’s important to note that indices are generally less actively traded as other markets, such as currencies, and therefore don’t offer the same high levels of liquidity.
Also, while currency trading is available throughout the day, indices are only active during local working hours and therefore there are more gaps compared to the forex market which may prove difficult to navigate for beginner traders.
The most popular stock indices
CM Trading offers the most popular and best performing indices across the world, providing clients with favorable trading conditions and risk-free access to the markets with demo accounts which can be used for training and strategy-testing.
Below you can find some of the most popular indices available on our platform:
- Dow Jones Industrial Average (DJIA)
Commonly known as the Dow, this highly popular index measures the performance of the 30 largest public companies in the U.S. The Dow Jones is a highly profitable index with more than $6.56 trillion in market capitalization.
While enjoying high popularity, this index may not provide an accurate estimate of the U.S stock market as the sample size of 30 companies isn’t large enough. However, it provides insights into the current investor sentiment and therefore is highly useful.
Companies included in the DJIA include Microsoft, Apple Inc, ExxonMobil, the Coca-cola company, McDonald’s, JPMorgan Chase and Visa Inc.
- Standard and Poor's Index (S&P 500)
Unlike the DJIA, the S&P 500 consists of 500 companies across various sectors in the United States and therefore can be seen as the most important indicators in assessing the health of the U.S stock market.
The S&P 500 enjoyed record highs during the start of 2020, but the worrying developments regarding the looming global recession and the coronavirus outbreak has led to a 30% decrease in its value.
- Financial Times Stock Exchange 100 Index (FTSE 100)
This index represents the 100 best-performing companies in popular London Stock Exchange (LSE) and includes notable brands such as AstraZeneca, Barclays, BP, GlaxoSmithKline, HSBC, Tesco and Vodafone Group.
The FTSE 100 is considered one the best representations of the UK stock market.
- DAX 30
The DAX 30 is a stock index that comprises the 30 largest companies listed on the Frankfurt Stock Exchange. This is a particularly popular index among traders due to the fact that it provides insights into the direction of the German as well as the European economy as whole.
Some of the companies listed in the DAX 30 include BMW, Deutsche Bank, Lufthansa, VW, Adidas, and Siemens.
If you are interested in trading the most popular indices available, open your CM Trading account today and your personal trading specialist will get in touch shortly to provide assistance and guidance regarding your profit targets and risk appetite.
Register now to get started!