Currently, the stock market is governed by index trading, which is determined by averaging the losses and profits of firms and world economies. It includes selling and buying financial instruments linked to the stock market indices that enable tracking of certain asset groups based on various characteristics like sector, industry, growth rate or country.
If you are new to trading indices and wish to leverage their advantages, you may gain some important insight from the following section. So, read on.
What is index trading?
Index trading is one of the sought-after ways for traders to access the financial markets without directly investing in bonds, commodities, stocks and other assets.
Trading indices can be the best option for someone new to financial markets. It can enable the individual to trade shares or index-tracking funds instead of selling or buying individual stocks of a company.
With the popularity of the online trading system, you can use two methods of index trading: index futures CFD and cash index. While the futures market expires after a point in time, there is no specific expiration date for the cash market.
What are the ways of calculating indices?
There are different ways of calculating stock indices depending on the index goal and type of firm. The two commonly used formulas for calculating the value are market capitalisation-weighted and price-weighted.
Market capitalisation-weighted
The market capitalisation-weighted index uses the value of all its constituent companies. You can determine the market cap by multiplying the company’s stock price by the outstanding shares. The companies with the largest market cap usually have the most influence over the value of the index.
Price weighted
The stocks in the price-weighted index get weighted in proportion to the price of their shares. It means firms with the highest share prices impact the index’s value the most.
What factors determine the index pricing?
The most crucial factors moving the index price are:
Economic news
Quarterly announced GDP data and months of data on consumer prices and industrial production are FX and stock market drivers.
The set interest rates by central banks also affect currencies and stock performance.
Financial statements of companies
Publicly listed firms on stock exchanges list their financial statements on a half-yearly or quarterly basis.
The earnings season is the period after the end of a quarter when firms disclose their results. The volatility of the stock index increases at the time of reporting as traders react to the companies’ financial results.
Company announcements
Company announcements like mergers and acquisitions, top management changes, and new product announcements impact stock prices.
Geopolitical events
Political events affect FX market performance and stock. For instance, presidential elections in the US exert influence over the international markets as the new administration may lead to changes in policies that might impact the global economy.
What are the benefits of index trading?
There are numerous benefits a company can have through index trading. They are:
- The companies have better opportunities to position themselves in the medium or short term by rationally using the rise and fall of credit index prices.
- Trading indices is less manipulative, so you can invest in them without buying.
- Index trading has several features that you can adjust according to varying economic situations.
- Index trading reduces the degree of risks and provides better security with its integrated money management.
Index trading is secured as an index can never go bankrupt. When selling or buying indices, you are not making a difference to the share price or employees’ lives. Also, you don’t impact raw materials or the country’s debt. If you have little or no experience, you can identify long or medium-term trends on indices, and you can get carried away if you don’t have an aggressive strategy.
