All You Need to Know About Trading Indices

Last Updated on September 2, 2023 by Umer Malik

Gone are when people used to invest their money only in traditional assets. These people are choosing diverse investment mechanisms, trading in different commodities and earning profits like never before. Traders now try their hands in forex and indices besides traditional stocks and shares. Visit MultiBank Group

What Are Indices?

Indices are performance metrics of a large group of assets. They measure the performance of a certain group of stocks that represent a section of the economy. For example, the index FTSE100 tracks the 100 largest companies on London Stock Exchange.

Trading in indices refers to speculation of the rise and fall of the price of indices over a certain time. Indices possess high liquidity. They can be traded for a longer time than most markets.

How to Calculate Indices?

There are several methods for calculating indices:

• Equal-weighted Index:

The equal-weighted index is a popular method for calculating stock indices. This involves simply adding the price of all the stocks involved and dividing the result by the number of stocks.

• Volume-weighted Index:

Some groups of businesses have a greater impact on the market than others. This is because the volume of trading in the stocks of such companies is significantly higher than that of other companies.

For instance, because of the difference in the volume of daily trades, Apple has a higher impact on the US stock market than Hewlett-Packard. Thus Apple makes up a larger portion of the indices. Such a method of calculating indices is called the ‘volume-weighted index’ and is more relevant. In addition, indices are periodically updated to give a more accurate representation of the state of the stock market.

Factors Affecting the Price ofan Index

Market Sentiments

In a bullish market, Investors tend to purchase more stocks. Thus the price of shares also increases with demand increasing the price of the index. And vice versa, investors lose faith in the stocks in a bearish market. Due to a huge sell-off, the share price decreases, decreasing the index value.

Company-Related Factors –

Changes in company leadership, dividend declarations, Mergers and acquisitions can affect the shares price in either way. The company’s stock price will rise if it has strong leadership, has successful product launches, increases in revenue and inflow of capital from investors, and reduces debts. Positive growth increases faith among investors. However, suppose the business is losing money, experiencing product failures, or increasing debt. In that case, most shareholders may lose faith in the company, resulting in a sell-off and a decrease in the stock price.

Economic Scenario

The country’s economic situation and global economic influence share prices in a huge way. When a country’s economic growth becomes slow and governmental policies are not aiding, investors exit from the market, especially foreign institutional investors. This results in huge selling off and a rapid decrease in the price of shares and indices.

Governmental Policies

The share prices of companies related to some industries and sectors typically increase when investors see the government’s recently announced policies favourably. Conversely, if investors consider the policies unfavourable, particularly those related to taxes, they impact investor confidence. This can result in a sell-off of shares.

Political Scenario

Due to the danger of market volatility and downfall, investors prefer not to invest in nations experiencing political unrest or instability. Therefore, any significant change in the domestic political environment may immediately impact the price movement of the market’s shares and indices.

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