How to Trade Indices
What is an Index?
Due to the large number of stocks being traded daily at stock markets around the world, it is humanly impossible to track and monitor every single stock in order to assess the performance of the stock market. This is why the use of statistics is essential in tracking overall performance. In statistics, a smaller sample is taken to represent the whole. In our case, that smaller sample is called an Index.
Simply put, an Index is a collection, or a list, of stocks. It is used to measure the changes happening in the selected group of stocks that statistically represent the market. The first index was created by Charles Dow in May 1896. It has evolved into what we know today as the Dow Jones Industrial Average (DJIA). Every major country today, has an index that represents its own stock exchange such as:
- FTSE – 100 of the largest companies listed on the London Stock Exchange.
- Nikkei – The top 225 blue-chip companies traded on the Tokyo Stock Exchange.
- Dax – 30 of the largest and most liquid stocks on the Frankfurt Exchange.
- CAC – 40 of the largest French stocks listed on Euronext Paris
How to trade an Index
You don’t need to buy shares to trade an Index. An index can be traded similar to how currencies or commodities are traded online; you speculate on whether the Index will rise or fall and open the right position accordingly. To make a profit when trading indices, you can either select to sell an index at a higher price than you bought it, or buy it at a lower price than someone else has bought it for.
An index rises or falls in value depending on the performance of its collective stocks. A change in the price of an index should ideally represent an exactly proportional change in the stocks that form the index. For example, if an index goes up by 2 percent, this would mean that the stocks in that index have also increased by an average of 2 percent.
SquaredFinancial provides direct market access to 8 major financial indices, including the FTSE 100, Dow Jones, and DAX30. You can open a Live account with SquaredFinancial to start trading Indices today. Additionally, you can practice trading Indices with a free Demo Account.