Index trading involves buying and selling the changing price of Stock market Indexes like the FTSE 100 or the S&P 500.
- Indices typically include the largest companies listed on a particular Stock exchange
- Indices are good indicators of trends in a market because they add up the price movements of all the companies within each Index
- Indices move more slowly than individual companies and are generally more stable in terms of price movement
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What is a financial Index?
Each Stock exchange will have its Stock market Index, usually calculated in real-time. This financial Index will represent how well the top Stocks listed on the Stock exchange are performing. For instance, London has the FTSE Index, composed of the 100 biggest companies by market value traded in London, but also a set of smaller Indices such as the FTSE 250, FTSE 350 and FTSE AIM.
How well an Index performs depends on all the companies listed in the Index. The exchanges tend to review the composition of the Index once a year and then adjust it depending on whether companies in the Index have become smaller or larger.
Some other well-known global Indices include the Dow Jones Industrial Average, the S&P 500 and the Nasdaq in New York. The DAX30 is based in Frankfurt, the Hang Seng is the Hong Kong Index while the Nikkei 225 represent Japanese Stocks. When Index trading you are trading the price of the Index itself – you don’t need to buy and sell the Stocks in the index.
Most indices focus soely on the stocks in a given country but the S&P 500 for instance includes global Stocks.
Some, like the NASDAQ, which only includes technology Stocks, focus on specific industries. When trading a financial Index it is important to keep an eye on Index news, for example changes in price caused by the Share price movements of big companies in the Stock market Index, or changes to its constituents, the companies which compose it.