The Stock market is a place where investors and traders have many options to enter stock markets and make a profit.
Indices trading offers one more avenue to make a profit. But before we dive in, we need to understand what indices are.
What are Indices?
Like a doctor keeps a thermometer in the patient's mount to gauge the temperature; similarly, indices give a financial health report of an entire sector.
You can trade on the prices of indices with the means of CFDs or Contracts of Difference and refrain from taking ownership of the underlying assets. Moreover, with more trading hours than most other markets, indices are a very liquid market to trade on, giving you more prolonged exposure to future opportunities.
Calculation of Indices
Several stock market indices are calculated based on a company's market capitalization. Top companies in a particular sector are chosen so their performance will impact the index's value more than the lower capitalization companies.
Some well-known indexes, such as the Dow Jones Industrial Average (DJIA), are price-weighted, nevertheless. With this strategy, firms with higher share prices are given more weight, which magnifies the impact of changes in their values on an index's current price.
Factors Affecting The Price Moment Of Indices
Several factors can influence an index's price, such as:
- Economic news: Any news related to a country's economy will likely fluctuate the price moment of specific sectors of a country's stock market. For instance, all business units took a hit in the pandemic in 2020, except the IT and pharmaceutical firms, which managed to survive.
- Companies' financial results: Profit and loss affect the indices' price moment. If the company is top performing or has a larger market capitalization, then any profit or loss will significantly influence the price moment of that particular sector.
- Company announcement: Any change in the top management or possible merger or acquisition can positively or negatively impact the index's price.
- Changes to an index's composition: When companies are added or withdrawn from weighted indexes, the prices of such indices may change as traders revise their holdings to reflect the changing composition.
- Commodity prices: Different indexes' prices will be impacted by various commodities. For instance, 15% of the FTSE 100's listed shares are commodities firms. Therefore changes in the commodity market might affect the index's price.
Different trading styles for index trading
Two trading styles are popular with traders:
- Cash Indices
Traders participating in the market for short-term gains, such as day traders, scalpers, etc., have a tiger spread than index futures. Cash indices are traded at the spot price, created by taking the price of a front-month futures contract and adding fair value.
To avoid overnight financing fees, many traders may cancel their cash indices positions at the close of business and establish fresh positions the following morning. - Index futures
Long-term investors often trade in index futures since the spread is more comprehensive than cash indices.
Traders often prefer index futures with a long-term market outlook. This is because the fee for overnight financing is included. As a result, index futures are exchanged at the futures price, at which futures dealers agree today for delivery tomorrow.
If you intend to hold onto an index investment for an extended period, trading index futures will prevent you from often paying overnight financing fees.
Importance of choosing a well-reputed stock broker or brokerage firm
Last but not least, selecting a well-reputed stock broker or a brokerage firm is essential; otherwise, they might eat the lion's share of your profit. It is one of the most critical steps when you begin indices trading.
Try searching for Blockchain Tradein, a trustworthy and reputed firm that uses the latest trading platform that rivals the best in the industry. With a dedicated client support center to cater to traders and investors like you and resolve any questions or queries by our team of experts. Join us today and be a part of our ever-increasing Blockchain Tradein family.
