instruments contents INDICES – arrowtradefx.com

What are indices?

Indices are a measurement of the price performance of a group of shares from an exchange. For example, the FTSE 100 tracks the 100 largest companies on the London Stock Exchange (LSE). Trading indices enables you to get exposure to an entire economy or sector at once, while only having to open a single position.

In finance, an index is a statistical measure of the changes in a portfolio of stocks, bonds or other securities representing a particular segment of the financial market.

Indices are used to measure the performance of a particular market or industry, and they are often used as benchmarks for portfolio managers and traders. Some of the most popular indices include the S&P 500, the Dow Jones Industrial Average, and the NASDAQ Composite.

To trade indices, you can invest directly in an index fund that tracks the performance of a particular index, or you can trade index futures contracts or options.

Index futures contracts allow you to buy or sell a specified amount of an index at a specific price and date in the future. They are often used by traders to hedge against market volatility or to speculate on the direction of the market.

Index options are similar to futures contracts, but they give the buyer the right, but not the obligation, to buy or sell the index at a specified price and date in the future. They can be used for hedging, speculation, or generating income through selling options.

When to trade indices?

The best times to trade indices can vary depending on the specific index you are interested in and the time zone you are in. However, here are some general guidelines:

The opening hours of the stock exchanges that host the indices are usually the most active times. For example, the New York Stock Exchange (NYSE) opens at 9:30 AM Eastern Time (ET), which is the most active time for the S&P 500 index.
The overlap of trading hours between different exchanges can also be a good time to trade. For example, the overlap between the London Stock Exchange (LSE) and the NYSE is between 8:00 AM ET and 11:00 AM ET, which can be a good time to trade the FTSE 100 and the S&P 500.
Economic news releases and important announcements can also impact the trading volume and volatility of indices. For example, the release of the US Non-Farm Payroll report on the first Friday of every month at 8:30 AM ET can cause a spike in trading activity and volatility for the S&P 500.
Finally, it is important to consider your own trading style and preferences. Some traders prefer to trade during more volatile periods, while others prefer more stable market conditions. It is important to find a trading time that suits your individual needs and preferences.

How to identify what moves an index’s price

An index’s price can be affected by a range of factors, including:

Economic news – investor sentiment, central bank announcements, payroll reports or other economic events can affect underlying volatility, which can cause an index’s price to move
Company financial results – individual company profits and losses will cause share prices to increase or decrease, which can affect an index’s price
Company announcements – changes to company leadership or possible mergers will likely affect share prices, which can have either a positive or negative effect on an index’s price
Changes to an index’s composition – weighted indices can see their prices shift when companies are added or removed, as traders adjust their positions to account for the new composition
Commodity prices – various commodities will affect different indices’ prices. For example, 15% of the shares listed on the FTSE 100 are commodity stocks, which means any fluctuations in the commodity market could affect the index’s price

What are the most traded indices?

DJIA (Wall Street) – measures the value of the 30 largest blue-chip stocks in the US
DAX (Germany 40) – tracks the performance of the 30 largest companies listed on the Frankfurt Stock Exchange
NASDAQ 100 (US Tech 100) – reports the market value of the 100 largest non-financial companies in the US
FTSE 100 – measures the performance of 100 blue-chip companies listed on the London Stock Exchange
S&P 500 (US 500) – tracks the value of 500 large cap companies in the US

US30

DOW

SPX500

S&P 500

UK100

FTSE

AUS200

ASX

FRA40

CAC

GER40

DAX

JPN225

NIKKEI

Symbol (Index)

US30 (Dow Jones Industrial Average)

This key index is comprised of 30 large, publicly traded companies in the US. Since it is price-weighted, the companies with larger share prices would have greater impact over its value.

SPX500 (US S&P 500)

Because it is float-weighted, the constituent stocks impact the index’s overall value based on their market capitalisation and float (i.e., the percentage of the company that is publicly traded).

It is also a price-return index, whereby dividends are not accounted for. Since its components are determined by the US Index Committee, all stocks listed must meet these criteria:

At least USD4 billion of market capitalisation
Annual dollar value traded to float-adjusted market capitalisation is greater than 1.0
Minimum monthly trading volume of 250,000 shares in the six months leading up to evaluation date
Securities listed on the New York Stock Exchange or NASDAQ

UK100 (FTSE)

It is a list of the 100 companies with the highest market capitalisation on the London Stock Exchange. In other words, these companies are the 100 most valuable on the stock exchange. It is a market-weighted index, meaning its value is proportional to its constituent companies. Larger companies have greater impact on its value than smaller ones.

AUS200 (ASX 200)

The index uses the same metrics employed by other common indices from Standard & Poor’s, such as the US S&P 500. For instance, the index is capitalisation-weighted; therefore, constituent companies with a higher market capitalisation will impact it more.

Moreover, because it is float-adjusted, companies with a larger percentage of publicly traded shares would have a greater impact on the index. It also has minimum liquidity requirements, and considers only stocks listed on the Australian Stock Exchange, which are selected by a Standard & Poor’s committee.

FRA40 (CAC 40)

Known in full as the “Cotation Assistée en Continu,” it refers to the stocks listed on France’s Euronext Paris (“Paris Bourse”) stock exchange. They are selected by an independent committee quarterly, out of the 100 companies with the highest free float market capitalisation (i.e., the highest market value that is publicly traded). Another factor to consider is stocks that are actively traded and suitable for underlying derivative products. Because it is capitalisation-weighted, stocks with a larger market capitalisation impact the index’s value more.

GER40 (DAX)

The “Deutscher Aktienindex” is an index made up of the 40 major stocks in Germany on the Frankfurt Stock Exchange. As a result, it is similar to the Dow Jones Industrial Average of the US in this regard.

ESTX50 (Euro Stoxx 50)

This index covers the 50 leading stocks across Europe. Because it is free float market capitalisation-weighted, the most valuable companies with the largest percentage of publicly traded shares impact the index’s value the most. However, no individual stocks can account for more than 10% of the index’s total value.

JPN225 (Nikkei 225)

It is the primary stock index on the Tokyo Stock Exchange. As it is price-weighted, the index is similar to the Dow Jones Industrial Average of the US. In fact, between 1975 and 1985 it was referred to as the “Nikkei Dow Jones Stock Average.” The index’s components are reviewed annually.