Index Trading

The calculation of most indices is based on the market capitalisation of the organisations that comprise that index. In this instance, the larger cap firms have greater weight, so their performance will have a more significant impact on the value of the index than the companies with a lower market capitalisation.

But there are some global indices that are weighted by the price of a company’s shares. So, the performance of those businesses with a higher share price has a greater bearing on the index than those whose share prices are lower.

There are a number of global indices available for you to trade. Here are some that tend to prove the most popular:

• Wall Street 30 (Dow Jones Industrial Average): Tracks the performance of 30 of the biggest publicly traded firms in the United States.
• Germany 40 (DAX): Made up of the 40 largest companies on the Frankfurt Stock Exchange.
• UK 100 (FTSE 100): The UK’s largest 100 firms, by market capital, as listed on the London Stock Exchange.
• US Tech 100 (NASDAQ 100): Measures the performance of the 100 biggest non-financial companies in the United States. Also referred to as the US Tech 100 due to its heavy focus on the technology sector.
• Japan 225 (Nikkei 225): A price-weighted index covering 225 of Japan’s largest companies.

Because global indices encompass a wider range of companies than when trading individual assets, there are several factors that can impact their performance. For example, commodity prices can have a huge bearing on exchanges like the FTSE 100, which has a significant proportion of commodity stocks.

Then there are changes to a company’s structure or composition, which could have an effect on its market capitalisation or share price and subsequently impact the performance of that index.

Traders will also closely monitor companies’ financial results, which can have a direct bearing on their share prices. Economic and geopolitical developments are also likely to play a part in the performance of certain global indices.

Trading global indices successfully is no easy feat but with detailed analysis, a clear strategy and the ability to quickly weigh up the risks versus the rewards, you’ll give yourself a far greater chance.

One trader’s idea of success might look entirely different to that of another, so the important thing is to define your goals and lay out a plan that will help you to reach them. It’s crucial to manage your expectations and try to avoid making emotional decisions. Use your in-depth research to guide you and construct a strategy that enables you to mitigate any potential losses. That will enable you to start your index trading journey with increased confidence.