Instead of investing in a single company, trading indices allows you to invest in a group of stocks. An index is mostly a list of traded underlying assets gathered according to their market capitalization, the economic sectors they belong to, their financial asset type or the country they represent.
There are many indices available to trade in the market and numerous trading strategies can be applied to take advantage of their price swings. Index trading can help traders gain exposure to different equity markets, while diversifying their investment portfolios and reducing their overall risk.
The most significant stock indices include Japan’s Nikkei, the American Dow Jones, Standard & Poor’s 500 (S&P 500), the NASDAQ, the United Kingdom’s FTSE 100, the French CAC40, and the German DAX30. Each component of an index contributes to the calculation of the index’s value, which helps it to rise or fall.
For instance, when trading the NASDAQ, it’s important to keep an eye on tech values, as they have a large weight in this index. Or when trading the DAX30 index, traders should monitor the automobile, pharma & healthcare, as well as chemicals values, as they represent almost 40% of the German index.