What are stock indices?
A stock index is a total value of a particular group of shares that are combined on some common basis (common industry, capitalization, number of securities).
Each exchange in the world and each country has a reference stock index. Since it would be virtually impossible to track every stock in every country, stock indices allow traders and investors to measure the overall performance of the stock market or the country.
Economists, politicians and analysts can use stock indices to understand how efficiently financial markets and companies operate in these markets.
How do stock indices work?
As stated above, the stock index represents performance for various indicators, for example:
CountryStock Index
(German DAX Index 30)
Group of shares in one country
(S&P 500 from the USA)
Industry Indices
(Nasdaq Index, which represents stocks mainly from the technology sector)
If the index value increases or decreases, this indicates a change in the overall performance of all stocks within the selected index.
The direction of the stock index, however, does not indicate that all individual stock prices of the index are moving up or down. The average of all stocks may become more valuable, but while some stocks rise, others may decline.
Benefits of stock indices?
Stock indices are an interesting alternative to other financial markets
Here are some of the benefits of trading indices:
- Trading on the stock market as a whole
- Instant diversification compared to stock market
- The ability to trade on different strategies at different time periods
- Possibility for long term trading
However, there are some disadvantages:
- Trading time is limited - while Forex can be traded 24 hours a day, 5 days a week, stock markets are open only during business hours
- Some stock indices are less liquid than other markets.
- Brokerage fees may be higher on less traded indices
Stock trading and index trading. What is the difference
If you compare stock trading with index trading, there are a number of reasons why someone might prefer index trading.
Investing in stocks means that you are exposed to any risks that a particular company faces. By contrast, investing in a stock index means that you are automatically diversifying because your investments are dozens of stocks.
In addition, several studies have shown that investing in indices is much more profitable than investing by choosing stocks individually. This is even more true because indices can allow you to diversify your portfolio even geographically.
Who should use index trading?
This type of trading is ideal for those who do not like to take risks and want to build long-term trading. Indices can reduce the risk of loss of funds, because even the most significant change in the stock price of one or two companies will not affect the index as a whole.
Our company provides full advice on stock index trading. If you are interested in this type of trading, we can answer all your questions and give recommendations on how to choose the right and profitable strategy for trading on the indices.