If you trade the stock market, you often are only concerned with the stock(s) you have invested in, and only want to know about what goes on with them.
However, there is also the need to put individual stocks together. It helps track the general performance of the market, or of the stocks in the group. This way, you can decipher if they are performing optimally.
Also, putting these stocks into a group can create investment opportunities, as you can now invest in a single basket of stocks. This group of stocks is referred to as an index or indices if they are more than one.
The index has a figure which is the result of the weighting of all the stocks in it. This is similar to the Forex rates in forex trading. These index figures move up and down based on the general movements of the stocks that make them up.
Popular examples of indices include the Dow Jones Industrial Average (DJIA) which tracks a group of some of the most important stocks in the US. The NASDAQ 100 tracks the stocks of the 100 largest companies listed on the tech-focused NASDAQ. The S&P 500 is for the largest stocks by market cap in the United States.
Other countries and stock markets also have their own indices. There are the FTSE 100 for the UK, Stoxx 600 for Europe, DAX 30 for Germany, Nikkei 225 for Japan, Shanghai Composite Index in China, and Nifty 50 for India. Note that each of these markets and countries has tens or even hundreds of other indices, but these ones tend to be the most popular and the most traded.
As mentioned earlier, investors can profit from indices. The profit can be in the form of index funds or indices derivatives. For indices derivatives, traders don't actually invest in the indices but profit by betting on their up and down movements. Here, our focus will be on trading these index derivatives.
Here outlined is a step-by-step process for you to follow if you want to trade indices:
The first step is to get signed up with a broker that offers indices trading. Most quality forex brokers provide access to trading in indices and many stock brokers as well. The broker we use at indexSignals is Moneta, you can Register here for free.
Instruments to be traded on brokerage platforms usually have their symbols on each specific platform. For instance, the Dow Jones 30 is called US30 by some and DJ30 by others. Some refer to the S&P 500 as SPY500.
All you need to do is get familiar with the symbols for your broker.
Just as with all other markets, you cannot just go on to trade without carrying out an analysis of the market so that you can make informed predictions of the potential direction the indices will move.
You can carry out fundamental analysis, which involves checking market-moving news to determine future market movements. The news items and reports that affect the movement of indices are usually those that have to do with the overall economy.
So, you should expect such things as interest rate decisions, unemployment figures, GDP reports and inflation rate. These reports affect almost all stocks and, as such, they will collectively drag the indices in either direction.
Other unplanned events such as natural and man-made disasters, positive and negative political happenings also have the ability to influence the movement of the indices. You can also use technical analysis by studying charts, although this will require careful study and practice over a considerable amount of time.
To cut the learning period short and to start earning right away, you can use Forex signals that include indices signals. However, ensure that the Forex signal service you use is credible and profitable.
Trading indices is quite profitable. This is because they make significant movements. They are, however, also risky. To avoid the risks and make money, sign up with a credible Forex signal provider.