Which Markets To Trade? Trading Indices http://www.financial-spread-betting.com/indices/Index-spread-betting.html PLEASE LIKE AND SHARE THIS VIDEO SO WE CAN DO MORE! An Index can be defined either by what it is or what it does. It is a “basket of stocks”, but that’s about as enlightening as a set of flat-pack furniture instructions…written in Korean. What it does is let people see how well a stock market is performing.
-Indices are a ‘basket of stocks’. They rise or fall depending on what happens to their constituent stocks.
-Most indices use a ‘market cap weighted average’ calculation, so they are more heavily affected by large stocks than by small ones. -However a few, including the Dow Jones 30, don’t use this method.
It pays to know what stocks and/or sectors are heavily represented in your index.
Now we look at the second market you may consider trading, particularly when you are just starting out. This is the market of indices, the combination values of various countries’ markets or sectors.
For instance, in America you have the Dow Jones Industrial Average (DJIA) or simply the “Dow”. This is made up of the values of the stocks of just 30 companies, and yet reflects the general state of US industry. It’s been going more than a century, and the only company that has remained on it all that time is General Electric. Other companies have been swapped out from time to time so that the index remains a good indication of the market. The companies are selected by the editorial board of the Wall Street Journal, which meets at intervals for just this purpose.
The great advantage of trading the Dow is that it is cheap to trade, with a small spread – the difference between the buying and selling price or bid and offer. It’s a great place to start your trading.
Also in America we have the S&P 500, which in contrast to the Dow uses the prices of the stocks of 500 companies to make up its value. When indices are made up, they usually don’t just add together the stock prices of the named companies to come to a total. They apply a weighting factor, which may for example mean that the stock price of a larger company has a larger effect on the index. The primary purpose of indices in the first place was to reflect the general investing environment, to report on how the markets are doing, so when they were set up the founders had that purpose in mind.
In the UK we look to the FTSE 100 for an indication of the strength of the economy. This combines the stock prices of 100 UK companies. With some indices, such as this and the Dow, there are actually a whole range of varied “sub” indices available, covering different market sectors, different company capitalization, etc., but it is generally understood which index is meant when you use the term FTSE (footsie) or Dow.
Another popular index is the DAX, which is the German market index. This tends to be more volatile than the others and thus can be hard to trade. But this also makes it more rewarding if you are up to the challenge. The French CAC is a similar sort of index, less popular than the DAX, and with slightly less volatility.
Before you decide which index to use, it’s worthwhile doing a little research online. For instance, you will probably want to know whether the index is biased towards the tech industries or whether it has a predominance of banking and financial components. If you know what sectors the index tends to be weighted towards, you are better able to understand how it moves.
This research is not something you have to do frequently, but it simply sets the stage for you to understand how the index value may vary over time.