Indices or Indexes are groupings of a specified number of stocks into
one trade-able entity, either representing a particular market or
portion of it. Although each stock can be bought and sold on its own,
and index can also be traded as a whole.Indices are bought and sold in
same way as an individual share.
Indices are mostly region based and investors also use them to gauge a
particular economy’s health. Trading on Indices also allows investors
to diversify their risk across the whole market instead of investing in a
specific company. Major Indices are S&P 500, Dow Jones in USA,
FTSE100 in UK, European indices such as DAX30 and Asian Indices such as
NIkkei225, Shanghai Composite.
Most of Indices are calculated using a market
value/capitalisation-weighted average, which means the size of each
company, is taken into account. The more a particular company is worth,
the more its share price will affect the index as a whole.
Example:FTSE100
However,Price-weighted indices base the weighting that a company has in the index on the company’s share price.Example: Dow Jones and Nikkei
However,Price-weighted indices base the weighting that a company has in the index on the company’s share price.Example: Dow Jones and Nikkei
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Indices Trading Example
Buying SPX500Opening the Position
Opening price USD $ 2082.60
You decide to buy 1 contract at $ 2082.60 (1 contract=1$ per index point)
Closing the Position
One week later the SPX500 has risen to $2092.60, you decide to take your profit by closing your buying position
Market movement= 2092.60 – 2082.60 = 10
Gross profit on Trade = 2092.60*1-2082.60*1= USD$ 10 ($1 per Index point)
