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:
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 Jones Industrial Average)
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
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.