Trading global market indices (explained for beginners)

The index is calculated from the price of its constituent stocks, usually as a weighted average. Any index lists the criteria a company must meet to qualify for listing.

By tracking the performance of a wide range of stocks, the index aims to reflect the state of a broad industry sector, or the country’s stock market as a whole.

Fund providers create active and passive funds linked to indices and derivatives that investors can use to buy and sell. Indices reflect the performance of the stock market in general, and the movement in the value of an index indicates the health of the economy or industry sector it tracks.

In general, there are seven common types of indicators. Global, regional, national and those based on stock exchanges, industries, currencies and sentiment.

Each of the major financial markets in the world has at least one financial index. For example, the S&P 500 (US500) is an index of the 500 largest companies in the United States. And the TASI index, which reflects the performance of the Saudi financial market.

The Euronext 100 Index (N100) tracks the largest stocks on the European Euronext stock exchange, which includes companies listed in the Netherlands, France, Belgium, Portugal and Luxembourg. Other major indices include Britain’s FTSE 100 (UK100), Germany’s DAX 30 (DE30), Hong Kong’s Hang Seng (HK50) and Japan’s Nikkei 225 (J225).

Industry specific indicators are popular among traders. For example, the NASDAQ-100 (US100) in the United States is the largest index of 100 high-tech companies. It is used as a measure of the performance of the technology sector in the United States.

Stock market indices are often referred to in news reports about financial markets and economies. They are considered indicators of business and stock market confidence, the performance of major companies in a given market, and economic health.

Stock markets are affected by political events and monetary policy, such as interest rate changes, currency fluctuations, and international trade.

Many retail investors choose to trade indices in their investment accounts, especially if they are saving for retirement.

Indices trading gives investors exposure to a range of companies. While some companies’ share prices fall over time, others rise. This diversification balances out the extreme volatility.

Indices’ values ​​fluctuate every trading session, but they don’t lose or gain large amounts unless there is a major change, such as a market crash, geopolitical event, or natural disaster.

Indices pose less risk than other single stock investments. If you invest in a company’s stock and the company goes bankrupt, you may lose your investment. But if a company falls in an index, it can be replaced by the next largest company out of the index. Depending on the size of the failing company and the performance of other components, the value of the index may decline temporarily, or it may not have a noticeable effect at all.

On the other hand, index investing limits the returns you get from a high acompany. Individual growth stocks can outperform an index by large multiples, although they carry higher risks.

Less chances of manipulation: the value of indices changes with the changes in the prices of the constituent stocks, so they cannot be manipulated.

Greater control over your money: With global market indices trading, you don’t just put your money in one investment, but rather diversify your investments and distribute your money in a group of the largest companies in the market.

Less risk: By investing and trading in global market indices, you guarantee that you will not be exposed to significa

According to the Index Industry Association, there are 3.05 million stock market indices around the world. They range from large corporate indices to industry sub-sectors, such as consumer staples, and topics, such as environment and governance.

The five largest indices by volume are the NASDAQ-100, S&P 500, Hang Seng, FTSE 100, and DIJA. Let’s get to know them in detail below:

The Nasdaq-100 is an index of the 102 largest US and global non-financial stocks on the Nasdaq Stock Exchange. The holdings are highly customized across industries such as technology, consumer services, and healthcare.

The NASDAQ-100 is a market capitalization weighted index and is weighted towards stocks with a higher value. A company’s market capitalization is calculated by multiplying the number of shares it owns by its share price. The index has certain conditions that limit the influence of the largest companies.

Technology companies account for 56% of the weight of the index and the ten largest companies account for 57.5% of the index.

Nasdaq selects its constituent stocks once a year in December, based on market data at the end of October and total shares outstanding at the end of November. The index is rebalanced every March, June, September and December.

The S&P 500 index companies are compiled by S&P Dow Jones Indices and are governed by the American Index Commission and is one of the most popular indexes. The large number of diversified companies it tracks is seen as one of the best performing global market indicators. The index covers about 80% of the market capitalization of US stock exchanges.

The S&P 500 is weighted by the floating market capitalization of constituent stocks, meaning that it includes stocks that are freely traded in the market and not stocks owned by a company’s board of directors, executives, and other insiders.

Companies must meet several criteria to be eligible for listing, such as earnings, liquidity and share floatation. Until then, admission is not automatic, as companies must continue to meet the requirements.

Decisions are made at the discretion of the US Index Committee, which meets regularly to make decisions about admitting companies to the index and implementing changes to methodology. The index is rebalanced every March, June, September and December.

S&P Global estimated that there were more than $11 trillion in benchmark index funds at the end of 2019, including $4.6 trillion in passive tracking funds.

The Hang Seng is an index of the largest companies in Greater China listed on the Hong Kong Stock Exchange. It is managed by Hang Seng Indexes, a subsidiary of Hang Seng Bank in Hong Kong. The Hang Seng Index is a modified free float index of companies, which applies a cap of 8% to prevent a single stock from dominating the index.

To reflect price changes in the market’s major industries, stocks in the index are grouped into four sectors: financials, utilities, and property, as well as trade and industry.

The index expanded from 55 to 58 companies on June 7, 2021. It aims to include 80 companies by mid-2022 and then stabilize it in the 100 companies, with 20-25 companies classified as Hong Kong companies.

Share eligibility is assessed by the HSI Advisory Committee based on market representation, turnover, financial performance and market capitalization. Decisions can be made to exclude components that do not meet these requirements.

The decision to exclude some of the smaller and less liquid ingredients, even if they meet the criteria, can be made depending on whether there are suitable substitutes. The index is reviewed and rebalanced every March, June, September and December.

The Financial Times Stock Exchange Index, known as the FTSE 100, is one of the best global market indices for trading and investment, which includes the 100 largest companies listed on the London Stock Exchange by market capitalization for free trading, with companies examined in terms of size and liquidity. These companies are grouped by FTSE Russell, a subsidiary of the London Stock Exchange Group (LSEG).

As the UK is one of the world’s largest economies and a major financial centre, the FTSE 100 is an important indicator for tracking the performance of companies in the UK. The FTSE represents about 81% of the UK market value on the London Stock Exchange.

Shares are screened for price, voting rights, free circulation, foreign ownership, volume, and liquidity. The index is rebalanced every three months.

The DJIA index was founded in 1896, making it one of the oldest global market indices. Commonly referred to as the “Dow,” the index is compiled by Standard & Poor’s Dow Jones Indices.

Unlike the S&P 500, the index is weighted based on the share price of each of its constituent companies. The index brings together 30 leading US companies and covers all industries except transportation and utilities.

DJIA has no official eligibility criteria. The stock is usually acceptable if the company is headquartered in the US and the company has a good reputation and sustains growth over a period of time. The index is governed by the Averages Committee which makes changes as needed rather than on a regular schedule.

There was a $32 billion benchmark for the Dow Jones index at the end of 2019, including $28 billion in negative securities, according to the S&P Dow Jones Indexes. Trading volumes for investment products linked to the Dow Jones Index are high relative to the number of assets that track the index, reflecting the index’s popularity.

The NASDAQ-100 is the most popular and highest index. The Invesco QQQ ETF (QQQ), which tracks this index, has become one of the largest ETFs in the world.

Between 2009 and 2019, the Nasdaq 100 rose 372%, based on price, for a total return of 430%, including dividends. However, as always, it is important to remember that past performance is no guarantee of future returns.

With such a focused focus on high-growth companies in the technology sector, the NASDAQ-100 is the most volatile major US market index. While this means higher risks, it also provides opportunities for investors to profit from trading on volatility.

Comparing annual total returns, which reinvest dividends, the NASDAQ-100 overall has outperformed the broader S&P 500 in 11 of the past 13 years, according to a first-quarter review by Nasdaq Investment Intelligence.

In 2020, the NASDAQ-100 index has outperformed the S&P 500 by more than 30%. But it’s important to note that there were also periods of underperformance, such as the first quarter of 2021, when the Nasdaq 100 rose 1.76% compared to a gain of 6.17% for the S&P 500.

The range of trading products available means that investors who want exposure to the NASDAQ-100 Index, but are reducing their risk can invest in the NASDAQ-100 Equivalent Weighted Index (NDXE). The NDXE gives each component stock an equal weighting of 1%, with only 10% allocated to the top 10 holdings, rather than more than 50%. This makes the weighting more diversified and less focused on the index’s technology stocks.

The prices of stock indices fluctuate based on the share prices of the constituent companies. For indices that are weighted averages, the performance of the larger components has a greater impact on them.

The interest rates set by central banks, such as the US Federal Reserve, the Bank of England, and the European Central Bank, affect the broad performance of stock markets. Expansionary monetary policy, including low interest rates and active asset purchases, tends to drive the stock market higher while rising interest rates tend to influence stock markets.

Weighted indices of companies that earn most of their revenue abroad can also be affected by currency exchange rates. For example, the FTSE 100 index includes companies that have benefited from the weakening of the pound sterling in recent years, as they have higher incomes when converting foreign currency sales revenue into sterling.

Elections and other political events can affect the performance of the stock market. The US presidential election is having an impact on markets internationally, as investors look at the potential impact of the incoming administration’s policies on the world’s largest economy.

The UK’s exit from the European Union has had a strong impact on the FTSE 100 and European stock indices since the Brexit referendum in 2016, with the feeling of potential for an agreement driving volatility. There remains uncertainty about the long-term relationship between the two sides as they continue to negotiate the details of the trade agreement and the UK’s exit settlement.

The first indicators were calculated as simple averages. Share prices of all components were collected and divided by the number of companies. But some of today’s major indices, such as the NASDAQ-100 and Hang Seng, are weighted averages. The two main formulas used to calculate the value of a weighted index are value-weighted and price-weighted.

Market weighted indices are calculated on the basis of the total market capitalization of the constituent companies. This means that the largest companies have the most influence on the value of the index.

The market capitalization of each company is calculated on the basis of the free shares available for trading. The market value of a company’s free float shares is less than the total market value, as it excludes shares owned by company insiders.The FTSE 100 and DAX 30 are examples of market capitalization weighted indices.

Price-weighted indices are calculated based on the share price of the constituent companies. This means that companies with the highest stock prices have a stronger influence on the value of the index.

Price-weighted indices are less common than market capitalization-based indices. The Dow Jones Industrial Average is the most famous example of a price-weighted index.

The indices are managed by committees that set the criteria that a company’s shares must meet to be eligible for listing. These committees meet regularly to review the index rules and make decisions about adding or deleting companies. Some committees conduct quarterly reviews while others choose annual reviews.

Some committees remove shares that no longer meet eligibility criteria, while others allow them to remain, or give them time to return to compliance.

The first indicators were published by financial journalists. The Dow Jones indices were calculated in the late 19th century by Charles Dow, who became editor of The Wall Street Journal, which was launched in 1889, and the statistician Edward Jones.

The Dow Jones Industrial Average is the second oldest in the world, coming after the creation of the Dow Jones Transportation Index, also known as Dow Jones Transports, in 1884. The Transportation Index calculated the average change in stock prices for the 11 largest transportation companies, nine of which were Railway companies. The indicators were first published in Afternoon Client Letters, a two-page daily financial news bulletin.

The stock market boom that preceded the crash of 1929 increased interest in stock indices. The Standard Statistics Company, the predecessor to Standard & Poor’s (S&P), published the first stock index in 1923. The New York Times and New York Herald Tribune began publishing indices during the 1920s.

The bull market’s recovery from the crash during the 1930s saw the release of more indices, such as the Financial News Ordinary Index in 1935, launched by the predecessor of the Financial Times, and later known as the FT 30.

The first index fund for investors was launched in the 1970s, and the first US ETF was launched in 1993 – the Standard & Poor’s (SPDR) S&P 500 ETF. Investor interest in these stock trading baskets grew after the stock market crash of 1987 and the technology boom, which began in the 1990s.

The explosion in popularity of ETFs since the 2008 financial crisis has increased interest in stock market indices, as more investors are drawn to passive investing strategies. Indices are mostly used to measure ETF portfolio returns, according to the Index Industry Association.

Trading indices is a way for individual investors to gain exposure to global or regional markets, without having to spend time analyzing the financial statements of many individual companies. They also reduce the risk of exposing your investment portfolios to underperformance or bankruptcy of individual companies.

Popular stock market indices provide investors with the opportunity to benefit from high levels of liquidity making it easy to enter and exit positions.

Investors can trade indices via mutual funds that manage the process on their behalf:

Passive funds, also known as tracking funds, hold stocks with the same ratio as an index to match their performance.

Active funds are managed by fund managers who aim to outperform the index.

Investment products, such as mutual funds, collect the dividends paid on the company’s shares in the index. They either distribute it to investors, known as a distribution fund, or reinvest it, known as an accumulation fund. Fund managers charge an annual fee as a percentage of the fund’s value.

Exchange-traded funds (ETFs) are an increasingly popular way for investors to trade index funds. ETF fund managers, such as Vanguard, charge relatively lower fees, so investors keep more of their returns. Since they are traded on exchanges, the price of an ETF fluctuates throughout the trading session unlike mutual funds for which the price is settled once per day. Exchange Traded Funds (ETFs) can be bought and sold quickly and easily through stock trading platforms.

In addition to index funds, there are many index-based derivative products that investors can trade to try to maximize returns. They include options or futures contracts that investors can use to hedge against volatility in an index, or to speculate whether it will rise or fall over a short period of time.

Contract for Difference (CFD) is a type of contract between a broker and a trader, where one party agrees to pay the difference in the value of an asset or security to the other party. The trader aims to make a profit from the difference between the price of the asset when opening and closing the position.

Using CFDs to trade indices allows you to try and take advantage of market volatility in both directions:

Long: If you think the FTSE 100 will go up, you can take a long position.

Short: If you think the FTSE 100 will go down, you can take a sell position.

In contrast, if you buy an index fund directly, you only make a profit if the value goes up.

You can trade directly with your CFD broker instead of using an exchange or mutual fund provider.

Another popular way to trade global market indices is Contracts for Difference (CFD) on online trading platforms.

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