In trading, an index is fundamentally a collection of stocks that have been arranged together based on specific requirements. For example, S&P 500 consists of the shares of 500 leading businesses based in the United States, whereas the Dow Jones Industrial Average (DIJA) incorporates the top thirty most traded shares.
Perhaps, the biggest appeal of trading indices is the fact that you can open trading positions based on a broader market perspective rather than focusing on separately quoted firms. By trading an index, you gain exposure to all the companies in the index, allowing for a great deal of diversity.
For example, let’s say a trader decides to take a position on FTSE100. This is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The value of the index is based on the individual performances of the stocks that make up the index.
Based on research, the trader decides that the value of the index will rise. He 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.
When trading with indices, traders only need to acquire a larger perspective of the stock markets, removing the need for extensive levels of fundamental and technical analysis.
Different indices are linked to different timezones so the performance of the Eastern indices can impact the opening performance of the Western indices. This creates excellent trading opportunities for binary option traders who, with a bit of research, can acquire extra insights into exactly how 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.
Industrial production figures are based on the monthly raw volume of goods produced in a country or economic region by industrial firms such as factories, mines and electric utilities. If the figures in the report are significantly different from the perceived “consensus number” before the release, indices react in the short term.
For example, a higher than expected number, during times of economic expansion, can cause inflationary fears. On the other hand, if the economy is lagging, this could trigger the purchase of equities, causing index markets to experience a short-term lift.
GDP, or gross domestic product, is one of the most important indicators used to gauge the health of a country’s economy – because it represents the total dollar value of all goods and services produced over a specific time period.
In binary options, when GDP rises above consensus, it is bullish for indices. The inverse happens when GDP falls lower than expected.
Sectoral stock price performances during periods of high and low oil prices are consistent with the expectation that oil price increases influence stock prices negatively via their impact on the outlook for corporate earnings.
Additionally, FTSE 100 for example, includes 5 oil companies including Royal Dutch Shell, BP, BG Group, Tullow Oil and Petrofac. Changes in the commodity market will therefore affect the index.
Dow, also known as the Dow Jones Industrial Average, is a stock market index created by Wall Street Journal editor Charles Dow. It measures the performance of 30 of the largest publicly traded companies in the United States including 3M, Apple, Intel, Nike, McDonald’s and Visa. Trading of the financial asset runs Monday to Friday from 13:40 GMT to 20:00 GMT.
The Nikkei 225, or Nikkei Stock Average, is a stock market index for the Tokyo Stock Exchange (TSE). It is a price weighted index which uses the Yen as its base unit and gives an accurate reading of a wide section of the Japanese market. Trading of the index runs Monday to Friday, from 00:30 GMT to 06:00 GMT.
The Standard & Poor’s 500, abbreviated as S&P 500, is an American stock market index that measures the market capitalizations of 500 of the largest publicly traded companies in the United States. It is one of the most quoted indices and is generally considered as one of the best representations of the U.S. stock market. Trading is open Monday to Friday from 13:40 GMT to 20:00 GMT.
Feeling ready to trade indices?