The Basics of Trading Indices
Indices allow us to study the performance of market sectors, helping us better identify investment opportunities and market fluctuations. Because indices track a large number of publicly traded stocks, traders can understand broad market movements and develop investment strategies accordingly. The price calculation methods used by indices can be categorized into two main types.
Market capitalization-weighted index
Market-weighted indices are calculated based on the total market capitalization of their constituent companies. This means that the larger a company’s market capitalization, the greater its impact on the index price. This is the most common indexing methodology, with the UK’s FTSE and Germany’s DAX being typical examples.
Price-weighted index
This type of index is calculated as the arithmetic mean of the stock prices of all its constituent companies. This means that the index calculation is based on the base period and current stock price, not market capitalization. In this case, the higher the stock price of a constituent stock, the greater its influence on the overall index price.
Nine global indices
Review the performance of international markets or specific sectors and compare investment returns. A stock index is a weighted average of stock prices. Examples of US stock indices include the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite Index.
US S&P 500 Index (SPX500)
Review the performance of international markets or specific sectors and compare investment returns. A stock index is a weighted average of stock prices. Examples of US stock indices include the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite Index.
NASDAQ
The most famous index representing the U.S. tech sector. While it also includes some other industries, it still features tech companies like Apple, Facebook, and Google.
German DAX Index (GER30)
The DAX is an index that includes the thirty largest German companies by market capitalization. It is one of the most heavily traded indices in the world and has higher volatility and daily fluctuations than other indices.
Australia ASX 200 Index (AUS200)
The index includes the 200 largest companies in Australia. It is a market capitalization-weighted index, meaning that companies with higher market capitalization have a greater impact on the index price.
Euro Stoxx 50 Index (ESTX50)
Composed of 50 of Europe’s leading companies, it is often referred to as the European “Dow Jones.” It is also a market capitalization-weighted index, with its composition reviewed every September.
Dow Jones Index (US30)
The index comprises stocks of thirty companies from nine core industries. A unique feature of the index is that it is a price-weighted average, so its performance is often used as a gauge of risk sentiment around the world.
UK100
It includes some of the largest companies regulated by UK company law, but not all constituents are incorporated in the UK. The index price is calculated in real time and is updated every second when the market is open.
Nikkei Index (JPN225)
The most popular index on the Tokyo Stock Exchange, it serves as a core indicator of Japan’s economic performance. The Nikkei 225’s performance shows a clear positive correlation with the US stock market.
French CAC 40 Index (FRA40)
The benchmark index for the French stock market. It is widely used to assess the health of Europe as a whole. The index includes well-known companies such as L’Oréal, AXA, and Michelin.