The indices are often neglected assets by traders, especially the novices, but that can bring much satisfaction. The opportunities to generate profits are numerous and the dynamics of readability are reasonably simple, also compared to the most quoted shares. Surely, doing trading with the indices and trading with shares are not exactly the same thing. The mechanics are rather different and this could cause more than one problem to the less experienced investor, less used to an approach that takes into consideration also borderline assets.
If certain measures are taken and trusting the right entities, it is possible to learn how to manage the indices trading in a short time. In this sense, the broker’s role is fundamental, who has to represent also a source of support, other than an operational tool.
Among the brokers who offer indices trading Key To Markets stands out. Broker of great experience and appreciated by traders worldwide, it distinguishes itself for the ability to offer a comfortable trading environment, for the abundance of tools (including indices) and for the affordable economic conditions.
Indices: general information
If you intend to do trading with the indices, you need at least an overview. Therefore, here is some general information about the indices and a short description of their peculiar features, especially in comparison with the shares.
Definition of index
The index, to be precise “share index”, is not strictly a financial or investment tool. In fact, the trading is made possible by a particular mechanism, the “derivation”: the index acts as underlying for a separate product, which follows its trend closely.
Also because the share index is indeed… an index, therefore a tool that includes performances. In particular the performance of a a basket of shares. Each index represents specific shares, generally connected to one another by elements of homogeneity. For example, the famous Ftse Mib includes performances of the most important Italian shares. The index produces always a numeric value, which is generally of the magnitude of thousands. Moreover, the shares within the single indices can be weighed differently (e.g. through ponderation).
Differences between shares and indices
Although they relate to the same context, which is the share market, indices and shares (at least under the trading profile) have noticeable differences. Actually, it can be stated that the dynamics of trading with the indices are considerably different from the trading with shares, without making futile reflections on which kind of investment is more profitable.
These differences should be known, in order to be able to exploit them to the trader’s own advantage. Here is an exhaustive overview.
The indices are less volatile. It is not surprising, after all the shares are probably the most volatile shares (excluding cryptocurrencies, which are anyway a separate world). In reality, the indices are reasonably moderate assets also compared to the other asset classes. There are many reasons, including the basket system. The indices, representing a group of shares, are subject to a dynamic of compensation. If a share expresses a certain volatility towards a direction, there will be another that will do the same in a reverse direction. This confirms that, as all indices traders know, it is the homogeneity of the various performances what makes the difference.
The indices are easier to read. This feature is a direct consequence of the previous one (and more, obviously). If a market is not excessively volatile, in the majority of cases it is not so difficult to read. Moreover, the special composition of the indices causes that, even being strictly connected to them, they depend on rather different market movers. In particular, different, less complicated to interpret, faster to analyse. From here comes the simplicity of trading with indices compared to shares.
The indices are influenced by several market movers. We have already anticipated it. For what concerns the fundamental analysis, it is then the elements that need to be studied to identify the performance of the asset, the differences are numerous and from a certain point of view also radical. If to identify the trend of the shares it is necessary to study especially (but not only) the economic and financial performances of the emitting company, in order to identify the trend of the indices it is more useful to look directly at the real economy. Also to analyse all the companies one by one would be very complicated, if not impossible. Therefore, before trying to trade with the indices, try to acquire a sufficient competence of the fundamental analysis.
Indices as underlying
The indices, as already anticipated, are products of investment in the strict sense. In fact, they cannot be exchanged in any way. They are “simply” tools that include the performance of a basket of shares. For this reason they can be traded only as underlying. If this on the one hand increases the costs (especially in terms of commissions), on the other it gives a higher degree of comfort to the trading activity. Moreover, the timeframes of the operations are shorter and more favourable for the trader.
What is the best tool of derivation for those who want to trade with the indices? The futures are a good alternative, but the best option is definitely the CFDs. These tools are in fact more agile, less expensive and guarantee good levels of customisation, although this las the element depends partly on the broker. Key To Markets is one of the best CFD brokers. Therefore, if you are thinking to trade with indices, take it in consideration.
The types of indices
There are various ways to classify the indices. The most used one, especially by analysts, involves a particular element: the ponderation and the distribution of the weight of the shares. Obviously, dynamics of this kind profoundly affect the calculation of the value of this index.
Equally weighted. In this case, all the shares have the same weight. So there is no ponderation. This kind is typical of the secondary indices, which represent shares that are not particularly important (but not necessarily less profitable).
Price weighted. In this case, the ponderation is made based on the price of the shares. Obviously, the more valuable shares have a higher weight. It is probably the most balanced method since it can offer a realistic overview of the power relations. In fact it characterises the majority of the “famous” indices.
Value weighted . It is a very particular index, which is employed especially to compose specialistic, niche indices. Moreover, the “value” indices are generally homogeneous inside, at least for what concerns the sector of reference. In any case, this method of ponderation is based on economic values as the capitalisation (and more).
The main indices
In the following are some of the most appreciated indices by the traders. Obviously, you will find all of them in Key To Markets.
S&P500. Famous American index. It represents 500 shares and is about 2,900 points. It belongs to the “price” category.
Cac 40. French index which represents around 100 shares. It is about 5,500 points. It belongs to the “value” category.
Dax 30. It is the most famous German index. It represents 30 shares and it is about 12,300 points. It belongs to the “price” category.
Ftse Mib. It is the most important Italian index. It is about 21,000 points and represents 40 shares.
Dow Jones. Legendary US index, point of reference also for the other indices. It is about 26,400 and represents 30 shares. It is a “price” index.
Euro Stoxx 50. Index which includes 50 European shares. It has a value close to 3,400 points.
Nikkei. It is the most important Japanese index. It is about 21,300 points. It represents 225 companies and belongs to the “price” category.
Advice to trade with the indices
Here are a few tips to conduct a profitable and safe trading with the indices.
Rely on a good broker. The indices represent very particular assets that, even having the same context as shares, are subject to totally different dynamics. Moreover, being traded through derivation tools, they could have higher commissions than usual. Therefore, in a perspective of saving and efficiency, the broker becomes fundamental. Only choose convenient brokers that at the same time offer a comfortable trading environment. Key To Markets is one of these.
Conduct a good fundamental analysis. As mentioned before, the indices are related to many market movers of the real economy. Therefore, the fundamental analysis represents an invaluable resource for the trader. Master this discipline in order to read more easily the trend of the indices.
Aim at trend following. We have already said this: the indices do not have excessive volatility. Therefore an approach able to offer the right mixture between caution and profit is the trend following. Exaggerating in the opposite direction could prove counterproductive. Moreover, the approaches based on the search for the inversion and breakouts the hardest to manage.