Indices trading or Index trading is a popular way for traders to gain exposure to financial markets without directly investing in individual company stocks, bonds, commodities, or other assets.
People new to financial markets start with index trading, meaning they trade an index-tracking fund or basket of shares instead of buying and selling individual company stocks.
When tracking the performance of a large group of shares, a stock index aims to reflect the state of a broader market, for example, the stock market of a country or a specific sector. This means that there is a tendency to be diversified.
How Are Stock Market Indices Trading Calculated?
Most stock market indices are based on the company’s stock prices. A company’s stock price reflects the collective opinion of investors. Companies with higher capitalization tend to have a more stable market and are less affected by negative news.
However, some popular indices, like the Dow Jones Industrial Average, are weighted by price. In this system, companies with higher share prices are given greater weighting than companies with lower share prices.
How To Identify What Moves An Index’s Price?
A range of factors can affect the price of an index, including:
- Economic news – It is possible for investor sentiment, central bank announcements, payroll reports, or other economic events to affect underlying volatility and cause an index’s price to move.
- Company financial results –Individual company profits and losses will cause share prices to increase or decrease, which can affect an index’s price
- Company announcements – Changes to company leadership or possible mergers will likely affect share prices, which can either be positive or negative.
- Changes to an index’s composition – As traders adjust their positions to account for the new composition, weighted indices can see their prices shift when companies are added or removed.
- Commodity prices –Different prices for various commodities will be affected. The price of the index could be affected by fluctuations in the commodity market, as 15% of the shares listed on the FTSE 100 are commodity stocks.
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