The contemporary stock market is one of the biggest financial entities in the world, and one that continues to grow at an exponential rate. As of December 31st, 2019, the total market cap of all global stocks was an incredible $70.75 trillion, highlighting the value of equities worldwide.
There are also numerous ways through which you can trade stocks and equities, with index trading offering a popular and relevant case in point.
In this post, we’ll provide a basic beginner’s guide to index trading, while asking how you can navigate the market and make a viable profit.
What is Index Trading and Why are They Important?
As we’ve already touched on, index options are effectively derivative contracts that are traded on stock indices such as the Nasdaq-100.
In more general terms, these indexes are used as benchmarks and gauges by which investors measure the overall health of a region’s stock market, while they also offer a fascinating insight into the best performing shares and industries.
More specifically, a stock index is a range of stocks that are collated from a specific market or sector. Aside from the Nasdaq-100, indexes such as the Dow Jones Industrial Average and the S&P 500 are amongst the most widely traded options, with the latter featuring a total of 500 large-cap stocks across an array of markets.
What Impacts on Stock Indexes and What are the Advantages of Trading Indices?
While stock indexes can be used to inform investment decisions in a number of different ways, you need to understand the various factors that can impact on indices.
First and foremost, the individual companies featured within an index have the biggest impact on indices, especially larger-cap entities that have the biggest and most influential weighting.
Like all financial markets, stock indexes are directly affected by a number of macroeconomic factors, including key data releases, geo-political events and the manipulation of interest rates. In terms of the latter, lower interest rates tend to boost the appeal of the stock market, creating a scenario where trading shares is more lucrative than holding bonds.
The good news is that modern-day traders can track these metrics through online platforms such as Oanda, which offer direct access to real-time news feeds and the type of detailed analytical tools that institutional investors have come to rely on.
This is why one of the first steps to trading indexes should involve registering with a licensed and reputable broker and one that also offers access to a demo account and simulated market conditions.
Ultimately, there are numerous advantages to trading indexes, aside from the level of exposure that this offers to target markets and sectors.
When trading indexes as opposed to individual stocks, it’s also easier to speculate on the movement of an underlying indice or marketplace, without having to assume ownership of a particular share or asset class.
Index trading is also similar to trading in the foreign exchange, primarily because it offers access to inflated leverage and market access even with a small investment.
On a final note, index trading also boasts low commission charges, which enable you to optimise the amount of profit that you retain over time.