The Basics of Trading Indices
Indices allow us to study the performance of market sectors, so as to better identify investment opportunities and market fluctuations. Since indices track many publicly traded stocks, traders can understand the general movement of the market by tracking the index and formulate investment strategies accordingly. The price calculation method it uses can be divided into two categories.
Market capitalization weighted index
Market-weighted indices are calculated based on the total market capitalization of their constituent companies. This means that the larger the market capitalization of a company, the greater its impact on the index price. This is the most common index compilation method, with the UK FTSE and Germany’s DAX being typical representatives.
Price Weighted Index
This type of index is the arithmetic mean of the stock prices of all component companies, which means that the calculation of the index is related to the base period and the current stock price, and has nothing to do with the market value. In this case, the higher the stock price of the component stocks, the greater the influence on the overall price of the index.
Nine global indices
Take a comprehensive look at the performance of the international market or a sector within it and compare the investment returns. The stock index is the weighted average of stock prices. The US S&P 500, Dow Jones Index, and Nasdaq Index are stock indices.
US S&P 500 Index (SPX500)
The world’s most well-known stock index, which is highly correlated with the performance of other markets. Created by a publishing company called Standard & Poor’s, the index includes the top 500 companies in the United States.
Nasdaq Index（NASDAQ）
The most famous index representing the technology industry in the U.S. Although it also includes some other industries, it still attracts attention with technology companies such as Apple, Facebook and Google.
German DAX Index (GER30)
The index includes the thirty largest German companies by market capitalization. The DAX is one of the most traded indices in the world, with higher volatility and daily fluctuations than other indices.
Australian ASX 200 Index (AUS200)
The index contains the 200 largest companies in Australia. It is a market capitalization-weighted index, which means that the larger the total market capitalization of a company, the greater its impact on the index price.
Euro Stoxx 50 Index (ESTX50)
Composed of fifty of Europe’s leading companies, it is often referred to as the European “Dow Jones”. It is also a market capitalization-weighted index and its stock composition is reviewed every September.
Dow Jones Index (US30)
The index consists of stocks of thirty companies from nine core industries. A unique feature of the index is that it is a price-weighted average, so its rise and fall is often used as a measure of risk sentiment around the world.
FTSE 100 Index（UK100）
It contains some large companies that are regulated by UK company law, but not all constituent stocks are established in the UK. The price of the index is calculated in real time, and the price is updated every second when the market is open.
Nikkei Index (JPN225)
The most popular index on the Tokyo Stock Exchange is a core indicator of Japan’s economic performance. The performance of the Nikkei 225 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 contains some well-known constituent companies such as L’Oréal, AXA and Michelin.