Indices are market tools that track a basket of related assets. These can range from stocks and bonds to commodities, real estate, and forex.
These tools serve as benchmarks for market participants to analyze overall market trends and conditions.
Definition of an index
An index shows the performance of a basket of assets that are picked for a specific reason. These assets may have many factors in common and provide a benchmark tool in measuring and tracking market performance. They may provide exposure to a certain group of assets without the need for picking them individually.
Why is understanding index trading important for traders?
- Indices provide a solid analytical tool for the relative strength of a given asset against the collection of assets with similar characteristics or from the same sector of the economy
- Trading these indices is a risk-averse strategy that can be very useful for investors seeking to safeguard their assets, as a basket of assets is subject to less volatility than an individual asset
- Indices can provide clear insight into the factors affecting a group of assets and what it may mean for the broader market
- Index trading is a quick way of moving your portfolio into less riskier assets during exceeding market volatility
Index trading explained in more detail
An index serves as a tool for measuring the performance of certain sectors and subsectors of the economy. Assets big and small play a vital role in the shaping of an economy and investors may want exposure to a specific niche subsector without the hassle of picking the assets one by one.
Major stock indices like the S&P 500 measure the performance of the 500 largest stocks tradable on US stock exchanges.
Indices not only can give traders vital information about the health of certain sectors and subsectors, they can be traded as CFDs. Most multi asset brokers are offering popular indexes such as US500, US30, UK100, GER40, etc.
Example of a forex index
Forex indices are a collection of forex pairs measured against their constituent currency. For example, the US dollar index (USDX) measures the performance of the greenback against other major currencies, such as EUR, CHF, JPY, CAD, GBP and SEK.
Such indices provide an analytical benchmark to the performance of the currency against major currencies to gauge its overall health relative to the market.
FAQs on index
Can I invest in an index?
While directly investing in an index is not possible, many funds pool investors’ capital to track a specific index as closely as possible by emulating their asset composition and performance. Such funds may be managed by a group of industry professionals or be passively left to mirror the index with very little input.
Are indices risk-free investments?
While index funds and other related investment vehicles carry significantly less risk than their individual components, they cannot be categorized as risk-free. They simply carry the identical risk as a weighted collection of their components. Apple Inc. (NASDAQ:AAPL) is subject to more volatility than the S&P 500 – the index Apple is a part of.