Index trading has become very popular recently because of its many advantages compared to other types of investments. For example, you can understand and use Index trading easily and can make investments from an internet-connected computer anywhere in the world and at any time.
Let’s first explain what indices are. Indices refer to the world’s share markets. A share index is simply a measure of a predetermined group of shares. For example, the FTSE 100 comprises the UK’s largest 100 companies by market capitalization. Buy calculating the value of one share of each of the shares, the value of the index is tallied. There are many share market indices to trade on. The largest and most liquid are the Dow Jones industrial average, S&P 500, Nikkei 225, FTSE 100 and DAX, but there are many more to trade on from around the world that offer unique trading opportunities.
Indices are basically a selection of shares that have been grouped according to a certain criterion or market sector such as the Dow Industrials or Transportation or Energy. For example, the Standard and Poor (S&P) 500 comprises those shares from the top 500 largest corporations in the world while the Dow Jones Industrial Average (DIJA) includes the top 30 most traded shares. Each index assesses and tracks the financial markets by using several techniques and tools. To see all the indices you can trade using contracts for difference click here.
Index trading especially suits those traders who like to specialize in the volatility of the share market but do not have the inclination or time to perform exhaustive investigations into individually quoted companies. Consequently, you will still be able to make informed decisions whether to go “long” or “short” (buy or sell) by undertaking a much broader viewpoint of the share markets. You can then track the movements of your chosen indexes on a regular basis by monitoring the data updates supplied by companies such as Reuters.
By trading index options, you can speculate on much broader market movements by making just one evaluation and decision at a time. This contrasts dramatically from trading shares and shares directly when you have to undertake detailed research into all those companies that interest you. Consequently, the advantage of trading the share market by using index trading is that you can avoid copious amounts of technical and fundamental analysis.
In addition, you have the prospect of trading indexes around the clock. Many traders take advantage of this fact in order to gain additional insights into how Wall Street will react to overnight developments when it opens at 9.30am EST. You can increase your success at performing this activity if you acquire an appreciation of the main driving forces affecting the markets overnight.
You also need to know the opening hours of all the prime global index markets. For instance, if you follow the twenty-four hour clock around the globe then the first market to open is the Nikkei in Japan followed by the Hang Seng in Hong Kong. Consequently, if you can gain insights into what is driving price movements on these Asian markets then this information will help you greatly to evaluate the Dow Jones Index and S&P500 when they open later in the day.
The trading of Index options was first allowed on the financial market in 1981. Index options are based on underlying financial indexes in an identical way to equity options. One of the main advantages of trading indices is that they allow you to be diversified into the overall share market or just a selected sector with just single investment decisions and transactions. In contrast, if you traded the share market directly, then you would have to make an evaluation and decision for each company of interest.
Consequently, this strategy will help you minimize your risk and allow you to support your trust in trading your selected asset. In addition, you could provide yourself with the opportunities to compound your profits, maximize your returns and minimize your risk exposure.
This post is also available in: GR