AN INTRODUCTION TO
INDICES

The stock market is world-renowned for making smart investors rich, and ill-informed investors poor. Although newcomers may be intimidated by its sheer size and reputation as a trading market, actually getting involved is far easier than you might expect.

The market operates much like a living entity. When all parts are combined, it makes a formidable creature.

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WHAT ARE INDICES IN TRADING

Before we can understand indices, we must first understand stocks. Each stock is a tiny fragment of a company that can be individually owned, but not individually operated. Also called shares or equity, this ownership share represents a percentage of the company - and the holder is thus entitled to that percent of the company's assets and earnings.

Investors commonly purchase a large number of each stock they are interested in, as the more they hold, the greater their ownership of the company. Majority shareholders have a large degree of power in the form of voting rights within the operation of the company. After all, they have financial interest in the business and would be personally affected should the company go through a negative financial period.

An index (collectively called indices) is a measure of a specific section of the stock market. Some of the most famous and most commonly traded indices include the S&P 500, the Dow Jones Industrial Average (or the Dow, in short), and the Nasdaq Composite.

Trading indexes allows investors to benefit from the collective spikes of what is essentially a smaller version of an entire market. Risk is greatly mitigated, as dips of some stocks are quite often carried and neutralized by other stocks who are performing well. In general, each one of these indices is known to generate an overall profit far more often than not, although actual profit amounts vary between years and are influenced by a great number of factors.

TAKING A CLOSER LOOK AT THE S&P 500

The S&P 500 index comprises of a variety of sectors, with the information technology having the greatest weighting. It is closely followed by the financial, healthcare, and consumer discretionary sectors.

The seven remaining sectors within the S&P 500 hold a relatively tiny percentage of a overall index. Combined, they make up less half of the index, yet their existence is valuable in keeping the markets balanced. These include:

  • Industrial
  • Energy
  • US utilities
  • Telecommunications
  • Materials
  • Real estate
  • Consumer staples

COMPETITIVE SPREADS

Product Symbol Exchange Product margin Minimum spread (pips) Average spread (pips) Typical spread (pips) Trading hours
Aussie 200 AUS200 SFE 5% 3.9 Not Available Not Available Monday 09:50 - Saturday 06:59
China 50 CN50 N/A 10% 150 1.257821 1.2 Monday 00:01 - Friday 23:58
Euro 50 EU50 EUREX 5% 3 Not Available Not Available Monday 08:00 - Friday 22:00
French 40 FRA40 EUREX 5% 3 Not Available Not Available Monday 08:00 - Friday 22:00
German 30 GER30 EUREX 5% 2 Not Available Not Available Monday 08:00 - Friday 22:00
Hong Kong 50 HK50 HFE 10% 10 Not Available Not Available Monday 09:15 - Friday 23:45
Japan 225 JPN225 OSE/CME 5% 30 3 3 Monday 08:00 - Saturday 07:00
Nasdaq 100 USTECH CME 5% 2 Not Available Not Available Monday 00:01 - Friday 23:58
Netherlands 25 NETH25 EUREX 10% 3 Not Available Not Available Monday 08:00 - Friday 22:00
Spain 35 SPAIN35 MRV 10% 5 Not Available Not Available Monday 08:00 - Friday 22:00
UK100 UK100 LIFFE 5% 0.8 Not Available Not Available Monday 08:00 - Friday 22:00
US 2000 US2000 N/A 10% 10 Not Available Not Available Sunday 18:00 - Friday 17:00
US 30 US30 N/A 5% 3 Not Available Not Available Sunday 18:00 - Friday 17:00
US 500 US 500 CME 5% 5 Not Available Not Available Sunday 18:00 - Friday 17:00

DO YOU HAVE ANY QUESTIONS ON Indices ?

WHY DO STOCK PRICES CHANGE ALL THE TIME?

In combination with demand and supply, a number of market forces affect the values of stocks. Simply explained, an increased interest in a particular, stock or index will tip the scale in favour of "demand", and the price will increase proportionately. Should the opposite happen and many investors suddenly wish to sell, supply will outpace demand, and the price will drop.

These constant fluctuations are caused by real-time market sentiment, often in response to release of company financial reports, incidents that take place, or a public figure making a statement about the company in question. It is also influenced by news coverage, political factors, investor moods, social changes, enconomic factors, and natural disasters.

Other than the above, the market is also affected by the market itself. As many traders sell, others clamour to buy the stocks at the reduced prices. Their personally-motivated efforts serve a greater purpose: helping to stabilise the market until the next influencing factor arrives.

For example, with an account balance of $20,000, you may decide that you are willing to lose up to 1 percent of your total capital, which caps potential loss to $200 per trade. With this in mind, the lot size of your trade needs to be adjusted in line with your stop-loss order, while remaining aware of your selected leverage.

WHY IS STOCK TRADING SO POPULAR

Trading the stock market has gained in popularity over recent years, leading to more people wanting to find out what all the fuss is about. To put things into perspective, here are some of the main benefits of having an online indices trading account:

  1. Work from home. Enjoy the ability to earn a handsome paycheck while working your own hours from a location of your choice.
  2. Benefit from low commissions. The number of brokers currently available forces the industry to keep commission fees reasonably low. Market competition always benefits the consumer!
  3. Trade around the clock. It is easy to trade almost any time of day or night using out of hours trading.
  4. Easy to learn. After doing preliminary research, it's quite simple to pick up the basics from practice-trading using our free demo account. No deposits necessary!
  5. Available to everyone. Anyone with an internet-connected device can learn to trade and can see profits if things go well. No expensive equipment or specialised software is necessary.

HOW TO TRADE INDICES

Many things have changed since the birth of the stock market, and all of them in favour of new traders. Where shares were once bought in person by a broker on a trading floor, they can now be bought online in real time, regardless of location.

Purchase or sale orders are still played by brokers, who in turn place them directly with the stock exchange on investors behalf. While this may still sound complicated, the majority of the process is executed electronically and much of it automatically, with algorithms dictating the order of execution.

As a new trader, you will need to create an online trading account with a broker such as One Financial Markets. We recommend that you immediately select "demo-account" (called practice account by some platforms) and practice trading risk-free before despositing any funds. Most platforms offer a tutorial to guide you through their dashboard and trading process step by step.

TRADING INDICES VS FOREX

One of the most commonly encountered questions from new traders is whether they should invest in Forex or the stock market. The short answer is that it depends on your trading style and ultimate objectives.

Trading stocks and indices are generally considered long-term investments, especially when it comes to "blue-chip" stocks which have garnered a reputation for delivering returns. While the stock market is enormous with a huge number of stocks available to invest in, it is dwarfed by the Forex market in trading volume, despite the latter's comparatively limited number of investment choices.

The most common form of Forex trading is short term trades, being opened and closed within 24 hours at either a profit or a loss - or in some cases, at break-even point. Some trades are are as short as a few minutes or even a few seconds, depending on the style and goals of the trader.

Because Forex trades are commission-free, there are no significant downsides to making a large number of trades every day, provided ou know what you are doing and are not acting rashly. Conversely, stock trading involves a broker commission on every transaction. When it comes to stocks and indices, the more is not merrier.

AN ONLINE TRADING PLATFORM FOR INDICES

One Financial Markets is a diverse trading platform with indices being one of the options available. Sign up for a demo account today to get a feel for the dashboard, and once you're ready, start trading!

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 78% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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