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Indices

What are Indices?

Discover everything you need to know about stock indices, including how to trade them and which markets are available fro you.

Indices measure the performance of a group of stocks. Rather than just focusing on the individual growth or performance of a singular company, indices allow you to gauge the overall health and strength of a market, and you will have heard them being frequently referred to in the media. You might have also heard them called stock indices, share indices, or simply the stock market.

Different indices track different groups of shares. In the UK, the FTSE 100 tracks the performance of the London Stock Exchange and includes companies like Shell, BP, HSBC, Vodafone and BT. Other indices might have a broader focus, such as entire region or continent – while others only look at a specific sector or industry.

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Major Indices

Here are some of the most popular indices:

  • • Wall Street (reflects Dow Jones): The 30 ‘blue-chip’ companies on the New York Stock Exchange, including Apple, Intel, Exxon Mobil and Goldman Sachs
  • •S&P 500 (US SP 500): the most widely used measure of the US stock market, the Standard and Poor’s (S&P) tracks the prices of the biggest 500 companies listed on the New York Stock Exchange and the NASDAQ. It includes all the companies listed on the Dow, plus 470 others
  • • FTSE 100 (UK 100): the FTSE tracks the prices of the biggest companies by market capitalisation listed on the London Stock Exchange. The largest companies in the index are usually found in the mining, energy (particularly oil and gas) and financial services sectors.
  • • DAX (Germany 40): the DAX follows the shares of the largest 40 companies listed on the Frankfurt Stock Exchange in Germany. The DAX index is dominated by the financial, automotive, healthcare and chemicals sectors, with key components including Allianz, BMW, Bayer and Siemens
  • • Nikkei 225 (Japan 225): This is the main stock market index for Japan, tracking the shares of 225 companies listed on the Tokyo Stock Exchange
  • • Nikkei 225 (Japan 225): This is the main stock market index for Japan, tracking the shares of 225 companies listed on the Tokyo Stock Exchange

How are indices calculated?

There are two different ways in which indices are calculated: either by market capitalisation (more common) or by price-weight.

Market capitalisation indices

Market capitalisation indices use the total market value of a company’s outstanding shares to assess how much it affects the index. This means that more valuable companies – also known as large caps - will have more of an influence on the index’s total value than a mid or small cap.

Examples of indices with market capitalisation: S&P 500, FTSE 100, NASDAQ

Price-weighted indices

Price-weighted indices use a company’s share price to determine how much it can move an index. In other words, companies with higher share prices will have a greater influence on these indices.

To calculate the value of a price-weighted index, you add the share price of each stock together and divide by the total number of stocks in the index.

Examples of price-weighted indices: Dow Jones, Nikkei 225

A company’s stock is generally classified as large cap (meaning it’s worth more than $10 billion), mid cap or small cap.

Why trade indices?

Trading indices enables you to get exposure to an entire economy or sector with one single position, instead of opening multiple trades across several companies.

Index trading and investing has grown in popularity over the past 20 years because trading indices enables you to get exposure to an entire economy or sector with one single position, instead of opening multiple trades across several companies. Here are some more reasons to trade indices:

  • • Diversification: rather than relying on a single stock, an index gives you exposure to a broad section of the market at once.
  • • Lower volatility: indices are usually less volatile than other asset classes, with their price movements balanced by the number of companies they track.
  • • Accessibility: rather than performing fundamental analysis on a niche stock to see if it’s undervalued, indices are a broader reflection of the overall economy.

As well as indices growing in popularity, there are also several reasons to trade the stock market using CFDs.

  • • Go long or short: with CFD index trading, you have two options when opening a position: going long or short. Going long means you’re buying the market in the belief that it will rise. Going short means you’re selling that market in the belief it will fall, so you can profit from falling prices as well as rising ones.
  • • CFDs are leveraged: this means you only need to commit a smaller initial deposit – also known as margin – to open a position that gives you the same level of exposure if you were to invest in the stock market directly. Bear in mind that while this magnifies any profits, it also magnifies losses – so it’s important to manage your money and your positions carefully and sensibly.
  • • Hedging your existing portfolio: if you’re an investor who owns various physical shares, you might short an index to protect yourself from losses in your portfolio. If a stock market loses value, your short position with the index CFD will increase in value – cancelling out the losses from the stocks. However, it’s important to note that if a stock market gains in value, your short index position would cancel out the proportion of profits made with your physical shares.

What moves an index?

A stock index’s price is determined by the movements of the shares it tracks. Here are a few factors to watch out for when deciding what might move stock markets:

Index trading and investing has grown in popularity over the past 20 years because trading indices enables you to get exposure to an entire economy or sector with one single position, instead of opening multiple trades across several companies. Here are some more reasons to trade indices:

  • • The political climate: politics can have a significant impact on stocks. Elections can mean a change of policy that could bring headwinds or tailwinds for business, international tension could bring tariffs and more.
  • • Company announcements: a new CEO, merger or earnings release at a key stock will often play out on the index it tracks.
  • • Economic data employment data, central bank announcements and inflation rates all offer clues to how an economy is performing – and demand for shares in strong economies is often higher.
  • • Industry news: if a headline impacts several large companies in a sector – e.g. mining or banking – then expect it to impact their broader index too.