Index trading is a popular choice for investors who want to play it safe.
Most countries have a financial index, so you have plenty to choose from. You could invest in the Dow Jones, or if you fancy dipping a toe in the Asian stock markets, check out the Hang Seng.
What are Stock Market Indices?
Stock markets offer investors a weighted average of prices from all companies included in the index.
A stock market index gives investors a useful snapshot of how a portion of the stock market is performing.
Popular stock market indices include:
- Dow Jones
- FTSE 100
- S&P 500
- Nikkei 225
- DAX 30
- Hang Seng
- Russell 2000
- Shanghai Composite
Some indexes are used to track performance in a particular sector, for example, the NASDAQ 100 Technology Sector Index.
How to Trade Stock Market Indices
Index trading lets you speculate on the price performance of the stock market as a while, rather than just one company. This is less risky than speculating on the performance of an individual company.
So, if you think the Trump’s America First policy is good for the US economy, look for a CFD that allows you to profit from a price rise in the Dow Jones.
What Factors Affect Stock Market Indices?
Think of stock market indices as barometers of a country’s economic health.
For example, the S&P 500 includes the largest companies in the United States, and the FTSE 100 includes the biggest companies in the UK. In the case of the FTSE 100, £56 billion was wiped off the index in the wake of the Brexit referendum vote in 2016. So, when GBP takes a huge hit, the FTSE 100 falls.
Other stock market indices are also affected by economic turmoil.
For example, the DAX fell below 13,000 in February 2018 when the Deutsche Bank recorded a hefty loss. And, in July 2018, the Hang Seng registered a significant one-day drop of 1,600 points when a huge Dow Jones points drop triggered panic selling in the Hong Kong markets.
The Benefits of Investing in Stock Market Indices
Investing in a stock market index means you can invest in a range of stocks rather than just one company. There are fewer costs involved when you invest in stock market indices such as the Dow Jones or DAX.
In addition, you don’t need to actively manage your investment, which you would need to do if you bought some Apple or Microsoft stocks. Instead, all that’s required is a periodic rebalancing to ensure your investment is on track.
Stock market indices often outperform managed funds, so bear this in mind when restructuring your investment portfolio.