Index trading, is a collection of stocks that have been arranged together based on specific requirements. S&P for example, consist of shares from 500 leading companies based in the U.S., and the Dow Jones Industrial Average incorporated the top 30 most traded shares.
Rather than focusing on separately quoted firms, in Index trading you can open trading positions based on a broader market perspective which makes trading indices more appealing to traders. Traders can also gain exposure to all companies in the index, which allow for a great deal of diversity.
Let’s take an example where a trader take position on FTSE 100, which is a share index of the 100 companies listed on the London Stock Exchange with the highest capitalization. The value of the index is based on the individual performances of the stocks.
After researching, the trader decides that the value of the index will rise. He therefore places a Call option on FTSE. If the index subsequently moves up by Expiry Time, the trader finishes In-The-Money and earns a payout.
Traders only need to acquire a larger perspective of the stock markets when trading indices. It therefore removes the need for extensive levels of fundamental and technical analysis. See best ways to learn about Forex Trading
Since different indices are linked to different time zones, the performance of Eastern indices for example can impact the opening of the Western indices. Excellent trading opportunities can be created by this and with a bit of research, traders can acquire extra insights into how exactly Wall Street will respond to overnight trends when it reopens at 09.30 EST.
Indices also allow traders to diversify their trading portfolio. For example, with stock trading, a trader is at the mercy of just one company’s share movements. In index trading, you achieve an effective diversification of risk.
Try Index Trading now