All you Need to Know About Indices

An index is basically the statistical measure of changes in a securities market. So these indices can be an imaginary portfolio of stocks and bonds that represent a particular market. It can also represent just a portion of the market.

Every index in the stock or bond markets has its own methodology for calculation. Usually, minor changes in the index are more important than the actual numerical value that’s represented by the index. For example, if the FTSE 100 or Financial Times Stock Exchange 100 is at 7,876.30, it tells investors that the index is eight times its base level of 1000.

But this doesn’t tell you what has changed from the previous day. As a result, investors need to look at how much has fallen (or risen) on the index. This will be represented by a percentage.

What’s the Relationship Between Exchange-Traded Funds, Mutual Funds, and a Trading Index?

Exchange-traded funds (ETFs) and mutual funds sponsor the creation of portfolios that mirror the components of certain indices. This enables investors to purchase a security that’s likely to rise and fall in tandem with a segment of the stock market, or with it as a whole.

The most commonly used trading index is the Standard & Poor’s 500 and it’s often used as a benchmark for the stock market. It includes 70% of stocks traded in the U.S. Another popular trading index is the Dow Jones Industrial Average (DJIA) which represents 30% of all publicly traded companies in America.

What’s an Indexed Annuity?

Indexed annuities are closely connected to the trading index like mutual funds. But it doesn’t sponsor a fund, it’s rather a portfolio put together to mimic an index in question. They often feature a rate of return that closely follows a specific index, but usually have a cap on the return.

This means that if you buy an annuity indexed by the DJIA with a cap of 5%, the return you will receive will be between 0 and 5%. Further, your return will also depend on the annual changes to the index.

It is popular among investors as it allows them to purchase securities that can grow with the whole market or broader market segments.

These indices are not limited to stocks and bonds, there’s also what’s known as a mortgage index. These are adjustable-rate mortgages (ARMs) where interest rates are adjusted during the lifespan of the housing loan. The London Interbank Offer Rate of LIBOR is probably the most popular mortgage index.

Why Trade Indices?

Index trading is a comparatively, safer and ideal form of trading with consolidated money management. While trading indices, there is less risk compared to the risk of trading the individual stock.

Indices are the less devious Financial Asset:

The value of the index changes as per the constituents companies price movement of the underlying index.

Implant Money Management Method:

While trading indices, investments are properly managed, like all the investments are not made into one fund. With the NASDAQ 100 index, the portfolio is diversified into the most reliable American high tech securities.

Low Risks:

Even if the indices might be volatile because of factors like economic forecast, natural disasters, an index loss or gain of 10% is already the massive historical event that will hit the news.

No Bankruptcy Risk:

An index can not go bankrupt like an individual organisation. If one of the companies in the index becomes bankrupt, then it is replaced by the other company.  However, if you invested in the individual stock of particular companies, you will lose all the money.

Advantage from the Global Economic Situations:

By investing in a group of companies, the traders can get advantage of the negative or positive dynamics of the global economy. Even if one company’s performance goes down, the index still can rise.

How to Trade Indices?

Traders can start trading indices by following some simple steps:

  • Select how to trade indices
  • Confirm what to trade index futures or cash indices
  • Open a Trading Account
  • Choose the Index
  • Confirm your goal short term or long term
  • Apply Stops and limits
  • Opening  and monitoring your positions

Select How to Trade Indices:

With ROinvesting you can trade indices with CFDs.  CFDs are referred to as financial derivatives, that means you can speculate on indices through CFDs.

CFDs are the agreement between two parties to swap the price difference from the starting point of the agreement up to the closing point.

With ROinvesting CFD trading is available for all clients. CFDs are traded in contracts that reflect the price trends in the benchmark market. CFDs are commission-free, and MT4 Trading Platform is available.

Confirm What to Trade Index Futures or Cash Indices:

With ROinvesting, you can get exposure to Index price by two methods: by trading index futures or cash indices.

Index Futures

The long term traders always prefer index futures. Because they have wider spreads compared to cash indices. Index Futures are exchanges at the  Futures price- means the price that is predetermined by the traders for future delivery.

If traders are aiming to hold an index position for the long term, then index futures trading will not incur overnight funding costs.

Cash Indices

Cash Indices are preferred by the short term traders like day traders because they have tighter spreads compared to index futures. Cash indices are exchanged at the spot price- means price derived by the applying fair value and fore month futures price.

Several traders might exit from their position at the end of the business day and enter the new positions next working day to avoid overnight funding costs.

Shares and ETFs

Traders can also trade index with ETFs and Individual Shares with ROinvesting.

Open An Trading Account:

For starting indices trading, traders will need a trading account with a broker. You can open the account with ROinvesting. It is a reputed and reliable online broker. It is authorised and regulated by the CySEC under the licence no 269/15 and offers all required trading platforms and tools.

Choose the Index:

It’s most essential to select an index based on the trading style. This will depend upon your accessible capital, risk-taking capacity and on your trading goal.  

For example, the DAX 30 is normally the volatile index which is ideal for the traders who are willing to take high risk and prefers short term trading. While S&P 500 is favourable for steady returns in the long term, which is preferred by the traders who look for long term positions with less risk capacity.

Confirm the goal going Short or Long:

Going short means speculating on decreasing value while going long means speculating on increasing value of an index.

If the performance of the specific sector looks good based on the listed companies of the index, then a long position would help to gain profit when the value of the index increases.

If the performance looks low, it might be that listed companies are underperforming; therefore going short will be beneficial as the value of index might decrease.

Place your Stops and Limits:

For risk management, in indices trading, stops and limits are crucial tools. The stop-loss order will close the position if the price level falls below the current price, while the limit order will close the position if the price level goes more favourable.

Opening and Monitoring the Position:

Once you have decided and ready to start trading indices, then you have to open a position. To open a position, you will have to go on a trading platform and choose the index you prefer.

Then confirm whether to trade at the futures price or the cash price and choose to sell if you assume the price will fall or choose to buy if you believe the price will rise. After that, select the size of the position and place the order. After that, monitor your open position, and when you want to book profit, you can close the position.

Final Thought:

Indices are the best trading options. The first stock index was launched in 1885 in the US. Now there are several indices markets across the world. If you have the proper risk management plan, you can make a fair amount of profit by both trading long term or short term.