Have you ever wanted to avoid individual share price volatility but still earn solid profits by participating in the equities markets? Many investors tired of individual corporations’ unpredictable fortunes 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 securities category, like technology, medical, retail, or aerospace companies. Plus, some mega-indices 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 trade any 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 the 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 – 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 increase or decrease.
If you primarily trade online for your account, search for a list of market indices and research each. Some might fall into your area of expertise. For example, the NASDAQ 100 might be a good fit if you know the technology sector well. The good news is that there are many choices, from general to specific, so be sure to shop around and research before jumping in.
What are the Most Popular Indices?
Here’s a listing of the most-traded stock indices globally based on the capitalization amount within each one. 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
- NASDAQ
- UK FTSE 100
- DAX (Germany 30)
- Euro Stoxx 50
- Advantages
Ask anyone who invests in the DJIA, S&P, or Russell, and you’ll hear about the advantages of averages over individual stocks. The primary benefit is immediate diversification because investing in the Dow exposes you to 30 equities rather than one or two. Even if several Dow Jones Industrial companies fall on hard times, there are still 27 others in your portfolio.
Index trading also protects against 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.
