A Guide to Trading Indices
Ask any financially-inclined person about their investment portfolio, and they’ll tell you about all the different investment avenues they’ve explored. However, no matter who you ask, you’ll notice some commonalities. For starters, nearly everyone will tell you they’ve invested in stocks.
People’s perception of stocks has always been favorable, and for a good reason. According to data from Goldman Sachs, the average stock market return over the past ten years has hovered around 9.2 percent. Naturally, people are inclined to pursue stocks as an investment vehicle that’ll generate sizable returns on their investment.
However, there’s a caveat to entering the world of stocks. It can be time-consuming and challenging. You’ll have to research companies before making accurate predictions about how market developments will affect their share prices. Likewise, you’ll need to comb through piles of paper, including the latest annual reports, quarterly earnings reports, cash flow statements, and more.
Researching about individual stocks can become an all-consuming experience. Hence, many investors will shift their attention towards indices instead. Consider noting that although indices exist for bonds and commodities, they’re not as widespread as stock indices. Therefore, we’ll primarily be focusing on stock indices since they’re the most actively traded.
What Are Indices?
Typically, when you purchase a stock, you’re buying shares of one individual company. Depending on market developments, you could make significant returns or incur losses on this one stock. Naturally, investors don’t wish to take such a massive risk. Hence, they’ll often try to diversify their portfolio by investing in more shares. They’ll often go about diversifying by selecting companies in different industries. Other times, they’ll try to hedge their risks by investing in a mixture of small-cap and large-cap stocks. However, the problem with this approach is that you need to identify shares that you think will appreciate. Moreover, you’ll have to research further by examining these companies’ financial reports. The entire process can often become exhaustive, particularly if you’re not a full-time stock trader or investor.
That’s where indices come into the mix. Indices naturally enable investors to diversify their interests without having to research every company individually. Stock indices provide you access to numerous similar assets within a option single instrument.
Generally, you’ll find that their country of origin or market differentiates most stock indices. For instance, if you decide to trade the FTSE 100, you’ll be placing your money in a share index of 100 companies with the highest market cap on the London Stock Exchange.
Likewise, if you invest in the S&P 500, you’ll be investing your money in the 500 largest US companies by market cap.
Stock indices then provide you an average of all these stocks, making it easier for you to determine the trend of the underlying stock market by tracking the percentage changes in the price of the indices.
Stock indices can help invest price-performance and current stock market performance with historical stock market performance. They can use indices to determine the performance of the overall stock market over some time.
Stock Market Movement
Why Trade Indices?
Therefore, by investing in indices, you’re spreading your investment into different companies. Doing so reduces your risk via diversification. In addition, you’re able to gain exposure to a country’s stock exchange or market-specific target industry.
. Stock indices may not be directly available to a majority of retail investors because of the huge capital required. However, they are available to most retail investors through CFDs. CFDs, an abbreviation for contract for differences, is a financial contract between a buyer and a seller. The contract states that the buyer must pay the seller the difference between the value of the underlying asset from the price of entry into the trade, up to the price at the point of exit of the position. You can use CFDs to speculate on the prices of individual stocks and other asset classes.
Investors often opt for indices over stocks for numerous reasons. They include:
Reducing Portfolio Risk
As we stated earlier, indices can be an excellent way to hedge your bets. They expand your interests over a country’s stock exchange or an entire industry. Hence, indices naturally diversify your interests.
Less Technical Analysis
Investors don’t want to part ways with their money easily. Hence, they’ll often perform detailed technical analyses before making any investment. However, technical analysis requires you to examine numerous charts. Doing so for every individual company can be a time-consuming endeavor. Investing in indices solves this problem. Investors can analyze a single chart and dataset instead of going through thousands of stocks to find the right one.
Technical Analysis
Less Risky than Individual Stocks
When you’re trading stock indices, you’re trading an assortment of stocks. That means your money isn’t in one single company. Therefore, experts agree that trading indices are safer than trading individual stocks because you’re not exposing yourself to company-specific risks.
Types of Stock Indices
You’ll often come across different types of stock indices. As we stated above, some indices focus on an industry, while others are more country-focused. Let’s explore the types of stock indices in detail.
Country-Focused Indices
Country-focused indices represent a country’s stock market as a whole. For instance, the S&P 500 is a broad representation of the US stock market. Likewise, the DAX 30 gives investors an insight into the German stock market.
Exchange-based Indices
It’s also not uncommon to come across exchange-based indices. These represent stocks listed on a particular exchange. For instance, the FTSE 100 is an index comprising the top 100 companies listed on the London Stock Exchange. Likewise, the NASDAQ 100 tracks the 100 largest non-financial companies on the NASDAQ stock exchange.
Sector-Based Indices
Some stock indices also track specific sectors. You’ll come across indices that only track healthcare stocks or construction stocks.
Trading Indices
Although CFDs are a straightforward way to trade indices, many investors may consider alternative methods. For instance, ETFs, an abbreviation for exchange-traded funds, is another popular way of investing in stock indices.
Investor
Trade Indices with Crystal Ball Markets
If you’re considering trading indices as a CFD, we’ve got you covered. We’re one of the best index trading platforms. As one of the best brokers for index trading, we enable beginners and experts to use our platform to gain exposure to the stock indices they desire. Visit our website for more information. Alternatively, register with us today to get started.