What are indices

What are indices?

Indices are a selection of stocks and instruments that are used to determine the growth or development of an industry or sector. These sector-wide tools allow us to see how an entire segment of the market is doing, giving us a better understanding of investment opportunities and market fluctuations.

The S&P 500 (USA), DAX 30 (Germany) and FTSE 100 (Great Britain) are a collective of the largest companies in each country, measured by their market value. Because the Index tracks a bunch of publicly traded stocks, by watching the Index, investors can understand general movements in the market and adjust their investment strategy accordingly.

How is a stock index calculated?

To better understand how stock indices are calculated, it is important to understand how they are built.

Every exchange expects its listed companies to meet high standards of bookkeeping and public reporting. Firms such as Standard & Poor's (S&P), Xetra, Financial Times Stock Exchange Group (FTSE), and others review the published reports to conduct audits of the health and growth of publicly traded companies.

Once compiled, these results are published by the companies, and investors around the world have relied on them for decades. The S&P 500, the DAX30 from Xetra and the FTSE100 were, through their honest insight into some of the largest companies worldwide, reliable beacons for investors in both flourishing and challenging situations.

Illustrative prices.

Can I make a profit from index trades?

Indices rise and fall daily. By doing calculations for groups of similar firms, investors can use these tools as indicators of the whole market or specific segments to better understand movements in the market.

For example, following a Netflix announcement, you might predict a positive impact on the tech industry as a whole. You can take a buy position on the US Tech 100 of the Plus500 and hope to make a profit on the index movement. If the index actually rises, you can close your position and benefit from the difference between your purchase price and the closing price. On the other hand, if the index falls and you close out your position, you will suffer a loss.

If you predict a negative impact on the index, you can open a sell position. If the price does indeed fall, you can close out your position and take advantage of the difference. If the index rises and you close out your position, you will suffer a loss.

Advantages of index trading

Trading indices can be an effective way to diversify investor risk because indices are subject to a wider range of influences than trading a single stock.

When trading individual stocks, the price fluctuates as a result of a large number of factors such as performance, sales, and confidence in the company's ability to make interesting products. When trading an index, the price doesn't depend so much on a handful of badly performing companies, regardless of the sign. If a handful of public companies report poor performance or losses, the index can still go up, depending on their weightings. At the same time, this means that despite reports of good growth from a few companies, the index can still fall if a more heavily weighted company reports losses.