Indices: The Trading Process
By trading indices, traders can predict whether an index will rise or fall, without actually buying shares in the underlying assets. In this respect, trading an index is similar to trading a stock, currency or commodity.
To make a profit, a trader can choose to either sell an index at a higher price than its initial cost(buy); on the contrary, a trader can buy an index at a lower price than they originally sold it for.
An index’s overall value is calculate by the entirety of tits shares, therefore, rising or falling value of the index depends on the performance of its collective stocks. To clarify, if and index is up, and more investors are buying than selling, then share prices will increase. However, if more shares are being sold than bought, the index will instead decline.
Trading on Indices vs. Trading on Equities
A stock’s value can provide you with insights into the financial state of a particular company, while indices are portrayals of markets and market sectors. It is important for traders to review events that may affect the value of an index, such as monthly employment reports, geopolitical news, and economic reports.
On the other hand, when trading individual equities, traders would be wise to track more specified company-related news about defects and recalls, new product leaks. Additionally, for those trading equities keep an eye out for future potential mergers, acquisitions, and company’s earnings release announcements.
These essential elements have the potential to dramatically and rapidly move an individual company’s stock prices. By contrast, trading an index exposes a trader to such risks, but at a much lower level.
The Volatility of Indices
Indices are usually made up of a set of stocks, but the constant, acute movements of share prices can indices relatively volatile. Don’t fear, it is highly uncommon for all the stocks listed on an index to simultaneously encounter major movements. Not that it is quite rare for indices to move by more than two points a day.
Nonetheless, there have been extreme cases where this has occurred. For example, any stock market crashes. The most famous amongst these are the US Market Crash of 1929 and Black Monday, the US stock market crash of 1987 – in which by the end of one day, Black Monday, the Dow Jones fell by 22.6% in value.
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