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What are indices?
Indices are a measurement of the price performance of a group of shares from an exchange. For example, the FTSE 100 tracks the 100 largest companies on the London Stock Exchange. Trading indices enables you to get exposure to an entire economy or sector at once, while only having to open a single position
You can speculate on the price of indices rising or falling without taking ownership of the underlying asset with CFDs. Indices are a highly liquid market to trade, and with more trading hours than most other markets, you can receive longer exposure to potential opportunities.
How are stock market indices calculated
Most stock market indices are calculated according to the market capitalisation of their component companies. This method gives greater weighting to larger cap companies, which means their performance will affect an index’s value more than lower cap companies.
However, some popular indices – including the Dow Jones Industrial Average (DJIA) – are price-weighted. This method gives greater weighting to companies with higher share prices, meaning that changes in their values will have a greater effect on the current price of an index
What are the most traded indices?
- DJIA (Wall Street) – measures the value of the 30 largest blue-chip stocks in the US
- DAX (Germany 40) – tracks the performance of the 30 largest companies listed on the Frankfurt Stock Exchange
- NASDAQ 100 (US Tech 100) – reports the market value of the 100 largest non-financial companies in the US
- FTSE 100– measures the performance of 100 blue-chip companies listed on the London Stock Exchange
- S&P 500 (US 500) – tracks the value of 500 large cap companies in the US
How to identify what moves an index's price
An index’s price can be affected by a range of factors, including:
- Economic news – investor sentiment, central bank announcements, payroll reports or other economic events can affect underlying volatility, which can cause an index’s price to move
- Company financial results – individual company profits and losses will cause share prices to increase or decrease, which can affect an index’s price
- Company announcements – changes to company leadership or possible mergers will likely affect share prices, which can have either a positive or negative effect on an index’s price
- Changes to an index’s composition – weighted indices can see their prices shift when companies are added or removed, as traders adjust their positions to account for the new composition
- Commodity prices – various commodities will affect different indices’ prices. For example, 15% of the shares listed on the FTSE 100 are commodity stocks, which means any fluctuations in the commodity market could affect the index’s price
HOW DO I START TRADING?
Whether you’re a new or experienced Trader, knowledge is the key to confidence. Needless to say, a successful Trader is an Educated Trader. Invest in your knowledge to increase your profits.
THAT’S WHERE WE COME IN.
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