What Is A Stock Index?

Take away coffee next to laptop and phone

Stock trading is all about selling and purchasing stocks whilst aiming to make a profit.

Traders, in this case, purchase and sell shares of the company. However, that is not the only way to make a profit in this market. It is also possible to trade the index. Find out how to do just that and what benefits this type of trade offers. 

Understanding Stock Index 

A stock index is calculated based on the data of a group of shares. Different indices can be used to evaluate a sector, market, economy, etc. Usually, the top shares are used in the calculation. In essence, they give insights into regional or global markets. 

Lots of those who like trading on index prefer to do this via CFDs. Everything here works like with a regular trade. This means that you purchase if you think that the index will increase and sell if it is expected to decrease. 

The following are the most popular options for indicies trading: 

  • The ASX 200. It is calculated based on the data from the top 200 companies in terms of market cap. They are listed on the ASX stock exchange (Australia).

  • The FTSE 100. This index is calculated based on the 100 largest companies in terms of market cap on the LSE stock exchange (the UK).

  • The Dow Jones. It is calculated based on the data from the top 30 businesses on the NYSE and NASDAQ (the US).

  • The DAX. This index is calculated based on the 30 largest companies on the FRA exchange (Germany).

Why Trade Indices?

You may wonder why you should use an index in trading instead of simply trading shares. The main reason is that it is much easier to analyse and predict the movements in a particular market or sector than the progress of a specific company. So, this can actually be a good option for beginners. 

What is important to consider when starting to trade securities?

Theoretically, a person who trades in the stock market (a broker or trader) can earn 1-5% of a deposit every day. (A simple $1,000 bank deposit at 12% APR would be $289,004 in 50 years. If you receive 6% per month, then in 3 years your capital will already increase 8 times). However, 80% of first-time investors lose their deposit. 

It is worth remembering that stocks are a risky instrument. When starting to work in the stock market, you have to understand that it is not a game, i.e. the luck factor is almost eliminated: stock prices are not changed spontaneously (they can be influenced by general situation in a certain industry, geopolitics). And even though it is simply impossible to take into account all factors affecting the price of a company’s shares, the main thing is to be as informed as possible, study the market in advance, build a model and a strategy. 

For example, a trader plans to buy Starbucks securities. Before this step it is necessary to at least compare the company’s performance with competitors in the industry. There is probably a small company with great prospects. For example, Starbucks needs to make a huge effort to grow twofold, while a small rival company only needs to open a cafe in another city. 

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