Have you ever wanted to avoid the volatility of individual share prices but still earn solid profits by taking part in the equities markets? In fact, many investors who are tired of the unpredictable fortunes of individual corporations turn to the indices for a measure of stability, predictability, and long-term safety.
So, what is a stock index and how can you take advantage of its price movements? For starters, there is not just one index but hundreds of them. They can track a specific category of securities, like technology, medical, retail, or aerospace companies. Plus, there are mega-indices that trace ups and downs in entire industries or market types, like the DJIA, the S&P, the FTSE 100, and many others.
As an investor, you can trade whatever index interests you. For example, if you have a good eye for the Dow Jones Industrial index, you can buy trade any of the several indexes that track the daily level of the DJIA (Dow Jones Industrial Average). Some think it’s easier to predict the movement of an entire sector of the economy rather than price movement of an individual company. When you invest, you only need to consider the average movement of the group of stocks.
How to Trade
You can buy and sell indices through different means. One way is with an exchange traded fund, commonly known as an ETF, which tracks the price of a basket of assets – which could be a stock index, a collection of stocks in a sector, or more. ETFs can be bought and sold as shares via online share trading platforms, like individual company shares.
Another method of index trading is via contracts for difference, or CFDs. Usually available from forex brokers, CFDs are financial derivatives that track the underlying price of an asset. You can also use CFDs to trade whether you think the price will move up or down.
If you primarily trade online for your own account, search for a list of market indices and do some research on each one. Some might fall into your area of expertise. For example, if you know the technology sector well, the NASDAQ 100 might be a good fit. The good news is that there are many choices, from general to specific, so be sure to shop around and do some research before jumping in.
What are the Most Popular Indices?
Here’s a listing of the most-traded stock indices in the world, based on the amount of capitalization within each one. Note that the DJIA is at the top of the list, meaning it is the most favored by investors worldwide.
- Dow Jones Industrials Average
- Standard & Poor’s 500
- UK FTSE 100
- DAX (Germany 30)
- Euro Stoxx 50
Ask anyone who invests in the DJIA, S&P, or Russell, and you’ll hear all about the advantages of averages as opposed to individual stocks. In fact, the primary benefit is immediate diversification because when you invest in the Dow, for example, you have exposure to 30 different equities rather than one or two. Even if several of the Dow Jones Industrial companies fall on hard times, there are still 27 others in your portfolio.
Index trading also protects you from price manipulation. No one company can make an announcement that impacts the entire Dow, which means pricing is transparent and not subject to the behavior of a handful of corporate bigwigs.
And as an investor, you still have the chance to specialize in a particular field. It’s common for investors to follow just one group of stocks they know well, like the UK’s FTSE 100, the German DAX 30, or the U.S.-based S&P 500. The number after each ticker symbol indicates how many companies’ shares are included in that particular index.