An index calculates the value of a group of stocks. There are hundreds of indices around the world, each of which is tied to a specific region and usually segmented by sector. For example, we usually think of the Dow Jones index as industrial, the Nasdaq as technology and the FTSE as UK.
If you understand a particular sector in a particular country, you can track the index and trade based on its price performance. If you study technology companies, the Nasdaq is the right one for you, but if you are interested in leading American companies, the S&P 500 index is your choice. Use your knowledge as well as the Traders Trends Bar and over 90 WebTrader editing tools to evaluate your index trades.
A stock index is a group of stocks that can be bought or sold as a single traded instrument. Nowadays, some traders speculate on changes in the price of a single asset, while others prefer to speculate using stock indices. Representing a group of stocks at once, this instrument can be used as an indicator of the health of an industry or even a country.
But things are a bit more complicated with the classification of stock indices. Some indices, for example, such as the DAX 40 are a group of the 40 best performing companies in Germany. Classified as a "national stock index," it gives an indication of the health of the German stock market.
But stock indices are not just made up of stocks that are grouped together because of their geographic location. Some stock indexes represent and track the performance of specific market sectors. For example, the US Tech 100 index tracks the performance of all companies listed on the Nasdaq exchange. By including predominantly technology companies, the US Tech 100 Index provides a picture of the health of the technology sector in the United States.
Since stock indices are made up of groups of companies, there are a number of different factors that affect the price of an index. In simple terms, if the stocks that form the index rise in price, the price of the index will increase, and vice versa.
Traders who speculate using stock indices can guess whether an index will increase or decrease in value based on market sentiment.
The price movement of an index is likely to be much smoother than that of other financial instruments, as one individual stock cannot trigger a huge jump in price. However, there is considerable volatility in stock indices because they can reflect broad political and economic shifts.