What are indices in trading?
We often read on many websites about economics and finance about indices, but maybe many of us do not understand, what are indices in trading?
There are many types of financial assets being traded through online trading platforms.
One of the most popular online tradings is a foreign exchange (forex).
However, forex is not the only type of prospective asset. Besides forex, indices/indexes trading is also known.
Indexes trading can be learned as well as learning forex. But what are indices in trading?
Trading indices with TenkoFX broker.
Regulated by the International Financial Services Commission (IFSC) of Belize.
Indices trading meaning
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The meaning of indices in financial markets is certainly different from the indices, in the book literature.
Indices in a book’s literature is an important term or list of words in a book.
Arranged alphabetically where this term or word has information about that page found.
Or in other words, an index is a list of words or it can be a phrase where the word is related to instructions on material found in the document.
Indices on the financial market are the combined prices of various shares.
Based on certain categories on the stock market that can describe the overall market conditions.
The first indices in the world are the Dow Index created by Charles Dow in May 1896 which contains the stock prices of the 12 largest public companies in the United States.
These indexes have now become the Dow Jones Industrial Average (DJIA) which contains the 30 largest and most influential companies in America.
There are still many indexes besides DJIA. Because in every stock market in one country there can be many indexes, each of which has a different category.
The Standard & Poor’s 500 Index (S&P 500) is also from the United States, containing about 70% of preferred shares from the stock exchange.
Then there are the NASDAQ indexes, which mainly consist of leading stocks in the technology sector. DJIA, S & P500, and NASDAQ also vary in pricing.
How to calculate indices
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How to calculate indices?
Each index has a different method of calculation, starting from the simplest to the most complex.
For example, the Dow Index was originally calculated only by adding stock prices from 12 companies, so the average value was taken.
Now the development of technology currently provides ease of calculation. After the calculation can be done automatically by a computer.
How to calculate the index by weighting prices more complexly in order to calculate the stock price and the company’s capitalization at the same time.
The meaning of capitalization (market value) itself is the current stock price multiplied by the number of shares outstanding.
Example of how to calculate using price weighting in the formation of index numbers:
If the total market capitalization of a company is $ 1 million and the overall market value of the shares of various companies in an index is $ 100 million, then that company contributes as much as 1% to the index.
If there are other companies worth $ 10 million, then the company can weigh 10% of the index.
This is just a simple example because the weighting method in making each index must be unique.
Indices by country
In many countries, each has indexes, and many have traded indexes for profit, as well as trading on forex.
Almost all countries have their respective indices, the largest being from the United States.
Indexes can be traded by anyone, without having to be registered as an investor in a particular country’s stock market.
This means that even if you are in Malaysia for example.
You can also trade indices issued by a particular country, even though you are not registered as an investor in that country.
There is only one requirement to eligible, that is, you must join a broker that provides indices trading facilities.
One of them is TenkoFX
Here are some popular indexes that are traded by many traders.
- DJIA or Dow Jones Industrial Average (United States)
- S&P 500 or Standard & Poor’s 500 (United States)
- Nasdaq Composite (United States)
- FTSE 100 (United Kingdom)
- NIKKEI (Japan)
- Hangseng (Hong Kong)
- Kospi (Korea)
And many more list of indices in each country included Chinese indices, you can read it on Wikipedia.
Index trading is also similar to forex trading, you can learn forex lessons as a basic analysis for trading indices.
How to get profit is the same, that is, Buy if the price will rise (uptrend), or Sell if the price drops (downtrend).
The trading platform and technical indicators used for market analysis are the same.
You can trade indices via the Metatrader platform too.
It’s just that the position size rules and forex trading times and indices are different because the stock market has more limited operating time than forex.
If you can trade forex for 24 hours from Monday to Friday.
But if you trade indices, for example, choosing DJIA, then it can only be done during the opening hours of the US stock exchange only.
Benefit indices for the trader
There are many different ways that forex traders make profits from trading currencies, both using technical analysis and also using fundamental analysis.
It turns out that some traders also take advantage of changes in the price of indices as a reference for trading on the currency that issued the indices.
For example, by looking at changes in the US Dollar Index (DXY).
If the US Dollar Index rises, it means the US Dollar is likely to strengthen (bullish).
Conversely, when the US Dollar Index falls, it means the US Dollar exchange rate is weakening (bearish) against most other currencies.
Why do traders use these changing data indices?
Because the US Dollar Index is a weighting of the exchange rate of the US Dollar against a group of other currencies (Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar, and Swedish Krona).
Many forex traders, especially those who focus on fundamental analysis.
They monitor the United States stock index because it is considered as an indicator of risk appetite.
Stocks indices are considered as high-risk assets, as opposed to assets that are considered low risks (safe haven) such as gold, Japanese Yen, and Swiss Franc.
When the DJIA, Nasdaq and S & P500 stock indices both increase over a certain period of time, it means that the market tends to take the high-risk asset.
At the same time, the price of gold, Japanese Yen, and Swiss Franc is likely to weaken.
Conversely, when the US stock indices weaken, the prices of these low-risk assets will actually increase.
Indices value for the investor
Many investors in the stock market also pay attention to changes in the value of indices as their consideration for buying shares.
Investors stocks will always monitor changes in the DJIA index, Hang Seng, and various stock indices from other leading exchanges.
Often the market moves in harmony.
If the US stock index today down, the Asian stock indices on the following trading day will also decline.
Although it is not certain to occur every day, correlation tends to be unidirectional in the medium term.
The movement of stock indices can also give an early signal before the recession.
For example as happened during the Great Depression and the 2008/2009 financial crisis, as well as when the recovery of economic conditions began.
Indices vs indexes, which correct?
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Maybe you often read on financial news portals that write the words “indices” and “indexes”, and this can be confusing with these two words which are correct?
Both are the plural of the word “index”, the difference is the word “indices” is the Latin plural.
While “indexes” is a plural form of English, although both have the same meaning, their use is actually different.
Indices refer to uses for mathematics, science, and statistics, while indexes refer to the use of written documents such as bibliography.
But over time, the use of the word “indices” exceeds the word “indexes”, so that this Latin plural occupies the search with an average higher than “indexes”
According to Google data, searches with the word “indices” are higher than the word “indexes”
Indices vs indexes which is correct?
The two words are accepted words for the plural form, from the index base words.
You can use any word to adjust to relevant topics.
In some mathematical contexts, indices are the preferred form.
In formal writing arrangements that are not related to mathematics, indexes may be a better choice.
Because the singular form is an index.
You can easily link the singular and plural forms of this noun to remember which version to use.
Indices Dow Jones, S&P 500, and NASDAQ
The Dow Jones Indices, S&P 500, and NASDAQ are the three indices that are the main indicators in the United States.
Dow Jones Industrial Average (DJIA), Nasdaq and Standard & Poor’s 500, these stock indices reflect the movement of stock prices on the exchange.
In this world, there are more than 5000 stocks listed on the stock exchange.
With a large selection of stocks available on the exchange, it might make investors be confusing.
Especially beginners, feel more confused when he wants to buy shares.
Of the many indices in the world, indices from the United States are the largest with methodology and high liquidity.
Especially the three indices as the most look by analysts and investors around the world.
Massive news coverage from Dow Jones, S&P 500, and NASDAQ stocks adorn every page of the news portal as headlines.
This makes it possible that the influence of the three indices will greatly affect changes in shares on other exchanges, for example on Asian exchanges.
Dow Jones Industrial Average (DJIA)
The Dow Jones Industrial Average is one of the indices most widely seen by investors, fund managers and analysts around the world.
The Dow Jones index has always been a reference for investors and observers of the stock market.
Not only those who trade on Wall Street, but also on any exchange throughout the world.
The Dow Jones index is the oldest index and the best-known index.
This index was first introduced by editors from The Wall Street Journal, whose parent company is Dow Jones & Co. in 1896
The inventors of the Dow Jones index are editors of the Wall Street Journal and founder of Dow Jones & Co. named Charles Dow.
He collaborated with statistician Edward Jones. So indices based their name.
These Indices were first calculated on May 26, 1896.
And published in the Customer Afternoon Letter, not in the Wall Street Journal.
In the beginning, there were only 12 companies that entered into the index calculation.
In 1928, the index was expanded to 30 issuers.
The composition of the Dow Jones index for the first time:
- American Cotton.
- Oil American.
- Sugar American.
- Tobacco Chicago.
- Gas Distilling & Cattle.
- Feeding General Electric.
- Laclede Gas.
- National Lead North.
- American Tennessee.
- Coal and Iron.
- U.S. Leather pfd.
- U.S. Rubber
The Dow Jones index is designed to describe the US economy.
Since the first launching, the index contained 12 issuers consisting of 4 railroad companies, cotton, gas, sugar, tobacco and oil companies
General Electric is one of the oldest companies that are members of the index since it was launched until 2016.
Dow jones times to time
Along with changes in the US economy that increasingly leads to industry.
Hence the issuers in the Dow Jones index get a change.
Fewer companies related to commodities, as substitutes are consumer and technology companies.
Dow Jones index constituent shares also come from the Nasdaq stock exchange.
Not only from the New York stock exchange like Apple.
The Dow Jones indices is an index that is calculated based on stock prices.
The value of Dow Jones is not solely the price of each stock but the amount of the price divided by a certain divisor number.
If there is a change in stock prices due to dividend distribution, the stock split will affect the index value.
So the Dow Jones indices continue to change.
There are several criteria for stocks to become constituents or listed on the Dow Jones index.
Among these is the company must be a very large company and a market leader in the industry.
Dow Jones for analyst
Dow Jones is often used by analysts to find out how the market responds, and some of what needs to be known are
- Indices Dow Jones reacts to events such as natural disasters, war, political unrest, and economic news.
- Using the Dow Jones indices for analysis means paying attention to current events and estimating what the market response is like.
- The Dow Jones indices also fluctuate based on economic reports, such as unemployment rates, job creation, interest rates, GDP figures, and other economic benchmarks.
- The Dow is a weighted price index. This means that stocks with higher values will have more influence on the index average than stocks with lower prices.
- Some analysts state that it does not reflect the overall condition of prices in the market.
- Changes in the value of the Dow tend to be related to overall market movements when the price changes are large volume.
The Standard & Poor’s 500 indexes or the S&P 500 gained popularity since 1957 was introduced by the rating agency Standard & Poor’s
The contents of the index are quite diverse reflecting the state of the US economy.
Consisting of 505 shares issued by 500 large issuers.
The capitalization of issuers included as constituents in this index is a minimum of 6.1 billion US dollars.
This index is an indicator to reflect the performance of stocks of large-cap companies.
Shares in the S&P 500 index are calculated by the Committee which consists of S&P analysts and economists.
The S&P 500 index is preferably used as a measure of shares in the US because it has members more than the Dow Jones indices, which has only 30 shares.
In addition, there are significant differences in the calculations from the two indices.
The S&P index uses the market capitalization methodology, which makes the weight of large-cap companies.
While the Dow Jones index is arranged based on price weights, the more expensive the stock price the greater the weight in the indices.
The composition of the S&P 500 indices is always evaluated periodically so that there are new companies that can be listed or exited.
Value indices S&P 500
The weight of each share in the S&P 500 is proportionally calculated.
Changes in the price of larger capitalized stocks will have more impact on the index value compared to stocks with smaller capital.
For example, in March 2000 the S&P 500 index reached its highest price at 1552.87 since an online business boom.
However, the index fell 50% again to the level of 768.63 on October 10, 2002, in line with the decline in share prices in the US.
Indices the S&P 500 again to reach the highest price on October 11, 2007, at 1576.09, but 2 years later it closed at its lowest level at 676.53 (March 9, 2009).
Since then, prices have rallied to 1848.36 on December 31, 2013, and new record highs occurred on July 3, 2014, and then in 1985.90.
With such high price fluctuations, the S&P 500 index is eligible to be traded on CFD (Contract for Difference).
The Nasdaq Composite Index
In addition to the two indices Dow Jones and S&P 500, there is one more index that is considered by investors and economic analysts, it’s NASDAQ COMPOSITE INDEX
The Nasdaq (National Association of Securities Dealers Automated Quotations) Exchange began operations in 1971 and was the first electronic exchange at that time.
Its main index is the Nasdaq Composite which contains around 3,000 shares listed on the Nasdaq stock exchange.
Issuers that enter in the Nasdaq index consist of various companies in various sectors, except the financial sector.
This index is arranged based on the capitalization method, the weight of each share on the index depends on its capitalization.
Every quarter there are adjustments to stocks in these indices.
The biggest portion of the Nasdaq index is the technology sector.
Technology shares weigh about 54% on these indices.
Therefore, the Nasdaq index is often a reference for the movement of technology stocks.
Other sectors are the consumer sector, such as restaurant stocks, retailers, and tourism.
Because of the greater weight of technology shares.
The Nasdaq index is considered to be noisier compared to the S&P 500 which consists of various stocks from various sectors.
On the other hand, the potential for strengthening is the largest.
The rise and fall of the index are closely related to the ups and downs of the technology sector.
When the dotcom bubble burst in 2000, the Nasdaq index fell sharply.
Index trading is another way to get profit from world financial markets.
Some brokers have provided indices trading facilities through their trading platforms, you can take advantage of these facilities if you have an interest in index trading.
You do not need to come to the exchange, but by utilizing broker facilities through their trading platform, you can trade index from home.
If you have learned the basics of forex technical analysis, you can apply to indices trading.
Are you interested? please try good luck.
Are you ready to start trading?
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