What does it mean to Trade Indices?
Indices basically mean indexes. An index is a measure of changes in your portfolio of stocks and represents a portion of the overall market. To break it down, it’s a benchmark value of stocks. Because it can get too hard to track all of the security trading in a country, indices are a workaround and offer a sampling of the market.
Trading indices reduces the risk associated with trading individual companies, allowing traders to take a larger view of a group of companies. Because you can trade global equity indices, you can geographically diversify your portfolio and therefore profit from either growth or contraction around the world.
The good news is you have the opportunity to invest an affordable amount in financial markets, all from the comfort of your own couch. If you’re new to investing you should take the time to read up and learn as much as possible before you begin investing your own money, and should instead try using a few different resources such as websites and book to educate yourself.
It can be a good idea to use a demo account as you familiarise yourself with these markets as you won’t need to actually use your own funds until you get the hang of it. You’ll find plenty of excellent information about this on the ADS Securities London website.
When people are discussing “the market”, they’re actually talking about an index. As the stock market becomes more and more important to our society, the names of specific indexes become part of the vocabulary of the average person.
The first index was created by Mr. Charles Dow in 1896. The Dow index was made up of 12 of the largest companies in the U.S, and now contains 30 of the most influential and largest public companies.
Before the world entered the digital age, it was important that it was as simple as possible to calculate the price of an index in the stock market. The Dow Jones Industrial Index was originally calculated by adding the prices of the 12 companies together and then dividing this number by 12. This mean that the index as really just an average. Today the methodology is called price-based weighting, and the weight of each security is now the stock’s price, relative to the total sum of all of the stock prices.
However most indexes aren’t weighted on price anymore, since stock split will change the weight of a company in that index, even if the business doesn’t fundamentally change. For this reason, most indexes are weighing companies based on something called market capitalisation. Computers make this possible and most indexes are calculated to the minute-ensuring they are accurate reflections of the current market.
One thing to remember is that an index is just a list of stocks, and anyone can create one. The difference between big indexes and small ones is the reputation of the company that actually puts out the index.