We often hear that stock markets open up or down through their indices. This is the main reference point for investors, traders, and other participants in the stock market. Indices show essential information about the industry or the market as a whole. This article will explain how to use stock indices for successful trading.
- What is a Stock Index
- Why Indices Are Needed
- Index Analysis
- Top and Popular Stock Indices
- How to Trade Stock Index
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Explanations and definitions of terms.
What is a Stock Index
Thousands of shares of various companies are traded on the stock market everyday. Some grow in value every day, others fall, and others are in an indefinite range. How do we determine the overall dynamics of the market? For this, we use stock indices also known market indices.
An index is a collection of stock within an industry combined into one asset, the index. These indices can be use as an indicator of the trends for a particular market subsection. Indices can be defined by a benchmark, capitalization level, or industry.
The stocks of these companies make up the index’s basket, and the value of the index is determined by averaging the value of all the stocks in the index.
Why Indices Are Needed
By the dynamics of the indices, one can judge whether the market is growing or falling. An increase in the index means that the shares of most of the companies included in it are growing. At least, this means that those companies whose percentage in the index is large enough to influence its value are growing.
By the state of an index, one can assess the situation in a country's economy or a particular segment of the market. In addition, thanks to this, you can compare how different sectors of the economy are traded in the market.
Analyzing the stock index chart's movement helps predict the movement of quotations of individual shares included in its composition.
It is especially true in the presence of any sustainable trend in the economy or its separate segment. So in a recession or economic growth situation, stock indices steadily fall or rise. This trend also affects individual stocks included in the indices.
Top and Popular Stock Indices
A large number of different stock indices operate on world exchanges.
Here are some major stock indices on the Olymp Trade platform:
- The Dow Jones Industrial Average is probably the most popular index in the world, including 30 of the largest and most famous US companies from various industries: finance, transport, consumer, food, and industrial. Analysts manually select companies for the Dow Jones Industrial Average
- NASDAQ Composite is the second largest stock exchange and the most popular US index in the world. It includes the most well-known companies in terms of capitalization, whose shares are traded on the NASDAQ stock exchange. Examples, are Apple, Google (Alphabet), Microsoft, Oracle, Intel, and Amazon.
- S&P 500 - the index is comprised of all major sectors across the country, including the 500 largest US companies by capitalization.
- Nikkei 225 - Japanese index, the most important index in the Asian region, which includes 225 companies.
- DAX is the German stock index, which includes the 30 most influential companies in the country.
- FTSE 100 is the most quoted index on European exchanges, including the 100 largest companies on the London Stock Exchange.
- CAC 40 - French stock index, which includes the 40 largest companies.
Stock indices can be created not only by exchanges but also by other market participants. For example, the Olymp Trade platform has a composite index.They are formed based on groups of assets according to industry and regional principles.
Here are some of them:
- Asia Composite Index includes the assets from and associated with the Asian continent. The index calculation is based on the stock market instruments and currency pairs, such as USD/JPY, USD/SGD, Hang Seng, and Nikkei 225.
- Commodity Composite Index reflects the integrated dynamics of the commodity assets, including natural gas, gold, silver, and Brent crude oil. With economic growth surging, the Commodity Composite Index grows since the demand for raw materials also grows.
- Europe Composite Index indirectly characterizes the economic situation in the EU. The index calculation is based on the key ЕС Euro Stoxx stock index, Britain’s benchmark FTSE 100 index, and the EUR/USD, USD/CHF, USD/NOK currency pairs.
- Maha Jantar Index is a region-specific asset for India. This index is based on rates of the most popular assets in the country and is highly volatile.
How to Trade Stock Index
Since stock indices are not assets, they can only be indirectly traded using additional instruments.
Here are some ways to trade:
- ETF (Exchange Traded Funds) for indices. It is a fund of shares and other securities traded on the stock exchange, repeating the composition of the stock index. The movement of quotations of such a fund repeats the action of the index. Thus, an opportunity is created to earn on this dynamic. ETFs can be not only direct but also reverse. For example, on the Olymp Trade platform, you can trade on the NASDAQ Reversal 2x ETF asset. The price of this exchange-traded fund reflects the mirror dynamics of the NASDAQ 100 index, accelerated times 2.
- Derivative assets. On the Olymp Trade platform, you can trade using derivative assets, whose quotes move in sync with stock index quotes.
- This method uses quotes of stock indices to trade assets that are part of these indices. In this case, the index acts as a tool that helps determine the direction of the trend of the asset you need.
The first two trading methods are suitable for Fixed Time Trading and Forex trading mechanics. The third method can be applied to all three trading mechanics available on the Olymp Trade platform, including the Stocks PT mode. Here are some examples of such indices for the Forex mode.
Fixed Time Trades is one of the trading modes available on the Olymp Trade platform. In this mode, you make trades for a limited period of time and receive a fixed rate of return for a correct forecast of the price movements for a currency pair, stock, or other asset prices. If this trading mode is most suitable for you, then the following types of indices are available for you. As you can see the list of available assets here is larger.
You can learn more about trading on Olymp Trade in the Help Center.
Time to Trade Major Stock Indices
Stock indices are an excellent tool for analyzing short-term and long-term trends in the world economy. By studying them, you better understand stock market performance, both globally and nationally. Finally, stock indices are an excellent investment tool, they are less volatile than the assets that make them.
Olymp Trade recommends using a demo account to practice and develop skills in index trading. It is the easiest way to understand the essence of trading and gain invaluable experience. Practice, raise your level, and move on to real trading! 💰Go to Platform
Risk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.
A stock index (stock index) is a composite indicator that is used to evaluate the behavior of a group of shares and subsequently assess the course of global processes taking place in the securities market against their background. The value of the exchange index is a calculated value, which is formed on the basis of the prices of all shares included in the calculation of this index, which are traded on an exchange. The number of stocks included in the calculation of a particular stock index, as a rule, can be determined by the number at the end of the name of the stock index: Russell 2000, S&P 500, Nikkei 225, FTSE 100, NASDAQ 100, Euro STOXX 50, CAC 40, DAX 30.
Fixed Time Trades (Fixed Time, FTT) is one of the trading modes available on the Olymp Trade platform. In this mode, you make trades for a limited period of time and receive a fixed rate of return for a correct forecast about the movements in currency, stock and other asset prices.
Forex is an international trading platform where currencies are bought and sold. It’s generally believed that the Forex market is the largest by volume and number of transactions. A Forex trader needs to predict how the price of a selected asset will change. In addition, the profit on the trade depends not only on the invested amount, but also on how much the price of the asset rises or falls.