What is an Index?
A market index tracks the performance of a specific “basket” of shares considered to represent a market or economy. The most popular International Indices around the world are:
- Dow Jones (DJIA)
- S&P500 (Standard & Poor Top 500 US Companies)
- Ftse in the UK
- Dax in Germany
- Japan Nikkei
- Alsi All Share Index in South Africa, and many more.
It is an aggregate value, derived from, combining several stocks or other investment vehicles together, and expressing their total values against a base value from a specific date in history. Each index has its own calculation methodology. Each index has a different base value, meaning that the percentage change is more important than the actual numeric point, or index value.
In the case of Financial Markets, an index is an imaginary portfolio of equities representing a specific market or a portion of it.
Why trade Indices?
It is a very quick way to take a position in the direction of the larger market direction. It is also helpful when hedging your portfolio. Studying all the equities in the Index is time consuming and is a tedious job. When trading an Index, you only need to study one chart for each country in the world.
Index trading gives any person exposure to all the world markets studying only a few charts. Understanding Index trading can be an enormous help to investors and traders to earn huge profits fast with little work.
Indices offer an easy way to determine the overall performance of the Stock Market, or even a segment of the Stock Market, over a period. It’s a very good indication of the performance of a specific economy. It is also useful to compare your portfolio performance with the Overall Index over time.
Day traders prefer to trade Indices Intra-day instead of Equities. Index trading is much cheaper to trade compared to Equities.
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