A Beginner’s Guide to Indices Trading
We assume here that you know about the index. You know it, that is why you are here to read a complete guide on it. You want to know why indices trading is being so popular these days, why many experts recommend index trading rather than holding financial instruments individually.
Herewith these questions in mind about index investments, we are writing this post. After you complete reading this post, you will learn how to trade an index. From the bright side to the dark side of indices trading, we will explain to you almost everything about it. So let's get started with it.
What Is Indices Trading?
As we have told you, an index is a benchmark for a particular market. This market can be a stock-market or equities market. A group of financial instruments is traced, and a grouped index is published in markets. From commodities to securities, everything can be traced in such away.
It helps a trader to get benefit from liquidity and market volatility. Indices trading is preferred if you are unwilling to invest in a particular stock or any other financial instrument. Every financial-market has a different index as the benchmark.
Types Of Indices Traded?
Many indexes are there to trade. From currencies to stocks, one can trade anything. But there are some types of indexes based on their market size and area.
A trader trades using these methods differently. Different reasons are there for losses and profits for different types of indexes.
Global indexes are used as a benchmark for a global market. It can be global stock markets or global commodity markets. Indices trading has some specific indexes for global markets. ETFs (exchange-traded funds) are also sometimes included.
There is no difference in working of the indexes, no matter if they are global stock indexes or national. All of the countries have national stock exchanges. Like the NYSE (New York Stock Exchange) of the US and the National Stock Exchange (NSE) of India.
NSE of India has Nifty as a stock index. Which can be said as a national index. Because it consists of only Indian companies.
Regional stock indexes or any other index is handy in indices trading. Whether you trade a commodity or forex. There are some national cum regional indexes such as Sensex.
Some indexes are industry-specific, rather than the size specified. They are not working with the market capitalization principle. These market indexes reflect the fluctuations of some specific sectors.
For example, the Dow Jones market index is used for the technology sector. These indexes help you a lot, whether you are an intraday trader looking to save brokerage. Some specific indexes are also there for crude oil and commodities.
Some Popular Indices Of The World
Now you know what kind of indexes there are. You can also classify these indexes based on small-cap and mid-cap markets, market data, and many other things. But below are some most popular and traded indices.
Dow Jones Industrial Average
Indices trading without DJIA is not even possible. Many derivative products are traded by many hedge fund management companies. This index shows the market price of a group of technology companies.
Standard and Poor's 500 is an index that is used for 500 publicly traded US-based companies. Many market experts use it for the market watch. Experts from different stock-exchanges use it for indices trading.
Are you in stock trading? Then NASDAQ composite is one of the best indexes to trace. We can use it for the small-cap and mid-cap market also. It is used by the NASDAQ.
It is a group of more than 3000 company equities. Stock traders use it in both market sentiments, whether it is bear-market or it is bullish.
The Wilshire 5000
Indices trading is beyond the midcap market index. It is the broadest index used all over the world. It concludes 5000 publicly-traded US companies. It is good to track Wilshire 5000 as a screener.
Euro Stoxx 50
Deutsche Börse Group provides this index to track European market stock prices. It has 50 companies listed in it, most of them are large-cap. Such low quantity indexes help traders during a recession.
Advantages & Disadvantages
For proper evaluation, you need to know the Pros and cons of indices trading. You can use indexes as market news or you can use it as market commentary.
But if you buy or sell using indexes, then you can get benefits. You can earn on one company, while others are seeing a drop in turnover.
There are many benefits of an index fund. So let's have a look at the bright and dark sides.
Following are some benefits of indices trading:
You can trade stocks with a very low chance of risks. Risk management is very easy in this all-share trading.
You will be using leverage for trading indices. Gainers of an index will get benefits along with they will cover the cost of losses.
Stock markets can be manipulated, but it is hard to manipulate the indices. Price change in index trading is not possible for market makers.
You may have seen a market crash or bankruptcy situations in stock trading. But there is no economic data that can prove that indices trading can face bankruptcy.
No matter if you are among market movers or an individual in the market game. The brokers in indices trading charge low brokerage or trading commission.
There are some disadvantages to index global markets. Let's see what these factors can slow down your profits.
Most of the market participants face this issue. The market calculations for indices trading are always complex. It is not easy to calculate why a sudden slump occurred in an index. Fundamental analysis and technical analysis are also hard. It is hard to use it as a technical indicator.
No Copy Trading
Most of the new traders always want to copy the trading portfolio of experts. Many trading platforms are offering this feature. But in index trading, it is always hard to do copy trading.
FAQ About Indices Trading
Q: Is it easy to trade indices?
A: Yes, it is easy to trade indices, if you know it better. But it is not easy without proper knowledge.
Q: Can a beginner succeed in indices trading?
A: Yes, a beginner can succeed in indices trading. Beginners can enroll themselves in trading courses to achieve success.
Q: How risky it is to trade indices?
A: It is not that risky to trade indexes. You can start them with very low risk.
Q: Why not so many traders trade indices?
A: It is complex to understand the phenomenon used by indexes. So most of the traders avoid indices trading.
Summary - Indices Trading
You can see that there are many advantages and disadvantages of indices trading. All these factors can be evaluated to decide whether you need to do it or not.
It depends upon your trading knowledge and behavior. Suppose you see yourself as a learner and want to learn to trade. Then you can win trades without any worry in this trading arena.
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