How The Indice Markets Work
When it comes to financial trading and binary options trading, in particular, there are four main types of assets. These include commodities and stocks, but not least is indices. For many years, investors have enjoyed predicting the outcome of some of the world’s leading stock markets, making, or losing, thousands. Today, investing in this market is as popular as ever.
Perhaps the easiest method of trading is derivative or binary options trading. You don’t need to buy stock, and you don’t have to invest thousands. You can predict the movement of these indices. Trading in this way is favoured in this particular market as you can merely predict the outcome – will the value of the index rise or fall?
Understanding indices requires a level of experience, knowledge and a specific element of risk that is prevalent with all types of trading. First and foremost, it is essential to understand this type of market and how to make money from it. Which ones should you trade on and how? We take a look in our guide to trading indices.
In this guide, you will learn:
- What an index is and what it comprises
- More about the most popular indices
- How you can trade within this market area
What is an Indice
The term ‘indices' is a plural of 'index', and when related to financial markets it is a measure of the value of the stock of a group of companies. Those listed are the top valued public companies. As an example, the FTSE 100 is a list of the top 100 companies on the London Stock Exchange (LSE) by the value of their shares.
There are many indices across the globe with each stock exchange having their own and can as an indication of the health of the economy of that country. These lists are not fixed and are quite transient because share values rise and fall. For example, a company can lose share value and drop off of the index with another company that has a higher share value replacing them.
In general, the top performing companies tend to hold their place at the top for a long time unless something significant happens to impact the value of the stock. There are many indices globally some more well-known and more valuable than others. Often, they are structured differently in terms of numbers that make up a particular index.
The first stock index was the Dow Jones, introduced in 1896 by financial journalist, Charles H.
Brief History of Indices
The first stock index was the Dow Jones, introduced in 1896 by financial journalist, Charles H. Dow. The Dow Jones Industrial Average was an average of 12 top stocks from the most valuable companies in the US. Because this coincided with the end of the Industrial Revolution, the list comprised of mainly industrial companies. All of the stock prices were combined and divided by the number of stocks.
Of course, this has since grown, and the Dow Jones is now a list of 30 of the top publicly owned companies in the US. The value of this index represents 25% of the North American market. Other indices such as the Standard & Poor can be traced back to 1860. In 1984, the FTSE 100 was formed to replace the FT30 which was established by the Financial Times in 1935.
It had a base level of 1,000. It wasn’t until 1985 that the NASDAQ introduced their index. Today there are 11 in the US alone with 10 in Western Europe and over 40 around the globe.
The Popular Indices
There are many indices all valued differently. The more popular and recognisable names include the FTSE, Dow Jones, DAX, NASDAQ and The Germany 30. Within these groups of top public companies, you will see many household names. Let’s take the Dow Jones as an example which is also popularly known as the Wall Street index.
Companies that make up this list include Apple, Microsoft, McDonald's, Coca-Cola and Disney. Included in the Germany 30 you will find Adidas, BMW and The Volkswagen Group. These lists include the biggest names in the world that are globally recognised. That’s some big names with some large share values. They go up and down in price fluctuating more at times than others.
Values are affected by global news, current affairs, natural disasters and can be effected individually by country or globally. Major company news of one company listed in the indices can have a dramatic effect on the overall value, so there is a lot to consider.
How Indices Are Traded
When trading, you invest in the movement of the index. Now each one can be calculated slightly different to the next but overall, is calculated on the combined value of the shares of the listed companies. Let’s say that the FTSE 100 is worth 7,000 points at the time you enter a trade.
If you predict it will rise by the expiry point, which could be 60 seconds or a matter of days then, as long as it does you will win. If the price dips below 7,000 and stays there until that trade closes, then you lose. Because there are so many factors that can affect the value of the indices, it requires skill, knowledge, experience and use of research and available analytical tools.
There is much to consider as so many factors can affect the prices. As we have already mentioned, one share having a dramatic rise or fall in price can have a significant effect on the rest of that index. For those who do the research, exercise patience and don’t allow emotion or instinct to rule, there is a lot of money to be made.
Shelly is proud of her current position as Head of Brand for a well-known organisation that owns several brokerages in the trading sector. She’s consulted for us since 2015 and readers can benefit from her insider knowledge of how brokers work. Learn more.