What Are Indices?
Indices are indicators that show a statistical measure of actual change in a securities market. For financial markets, each index consists of a portfolio of securities which are representative of a selective market or part of the stated market.
You will find 20 indices on our platform. For example, the S&P 500; Nasdaq and the Dow Jones which are all in the USA; Japan’s Nikkei Index; the Hang Seng in Hong Kong; London’s FTSE; Germany’s DAX; and Moscow’s MICEX Index.
Indices are naturally less volatile than assets in the other three trading categories. This is good news because less volatility means more stability and relative consistency in the direction the index moves can be expected.
Just as in the other three categories of assets, you enter into a contract making a decision based on the belief that the asset price will either increase or decrease. The principle holds true for Indices, except it is not a market price that you are considering but a number (i.e., the point total). Other than that the principal is exactly identical. You choose an index and then decide to either open a buy position, meaning you will profit if the index rises or a sell position, to profit on a declining index.
What are the factors affecting Index movements?
An index reflects the performance of its constituent stocks and bonds. In general, we should consider the following factors:
- CONSUMER SENTIMENT – is derived from surveys concerned with what consumers feel about the performance of the national economy. If consumers are feeling more optimistic, they will spend rather than save their money and this results in turn with a boost in fortunes of the corporate sector.
- CREDIT RATING DOWNGRADE OR UPGRADE – credit rating agencies issue periodic reports stating their considered assessment of a company’s credibility and performance, and these rating statements have a knock-on effect on the price of a company’s stock, which can increase or decrease therefore based on where the credit rating is an upgrade or downgrade.
- CRUDE OIL PRICES – The price of oil is very important to a company’s profitability because it represents a cost factor variable and impacts on all sectors of the economy.
- LABOR DATA – Unemployment figures are regarded as an indicator of the state of the economy, and therefore, when figures are released to public, information there can be a knock-on effect upon confidence in markets and thus indexes.
- GROSS DOMESTIC PRODUCT – GDP figures indicate the monetary value of the goods and services produced by an economy. When the GDP figures increase it means prosperity and a growing economy, and vice-versa.
The advantages of investing in Indices.
Indices are much more diversified and therefore carry less risk than trading on individual stocks which can sometimes present surprising price movements. For instance, having your trade on the entire index instead of an individual stock, means you are spreading any risk across the whole index. Indices have a general trend that reflects the sentiment of an entire market. Trading online is perfect for speculating on Indices as their movements usually are consistent and therefore simple to predict.
What Are the Risks of Trading Indices?
Because an Index is comprised of many companies, it is impractical to analyze them all. Conventional Index traders have to invest through brokers and therefore rely on the opinion of market analysts, who may give generalized recommendations based on the inaccurate and out-of-date information. The best way to avoid this kind of risk is to invest through online trading. It is less time consuming and instead of charting points you assign the general direction in a contract.
We invite you to consult with your MottoFX customer representative today for more information.