Stock indices represent the value of baskets of publicly listed companies across sectors. Traders use indices to track the overall performance of an economy and examine the return on different financial instruments in order to select potential trades. They are popular amongst traders because they offer narrow spreads, smooth chart patterns, and high liquidity. Keep on reading to find the best types of indices in the stock market.
What are Stock Market Indices
Stock market indices analyse the worth of a section of a country’s stock exchange market through a market-cap weighted index of selected stocks. With these indices, analysts and traders alike can assess the market and compare several investments. Most exchange-traded funds (ETFs) and mutual funds try to analyse these indices to offer traders excellent knowledge of a given stock exchange market, read here for more information. The top three most common stocks indices include:
- Global Stock Market indices: Global indices analyse worldwide equities. For instance, the MSCI World Index tracks mid and large-cap stocks equities across the top 23 developed countries. As a trader, it is worth noting that global indices weighted via market capitalization lack exposure to frontier or emerging markets due to the small size of these markets. Besides MSCI, other popular global indices include S&P Dow Jones Indices, FTSE all-world index, Dow Jones global titans, S&P global 100, and S&P global 1200 index.
- Regional Stock Market indices: Regional indices analyse equities from particular regions worldwide. For example, these indices can cover the European, Asian, or Latin American equity market. They assist analysts and traders in comparing the performance of particular countries’ economies to a specific region. In so doing, traders can easily recognise the under- and over-performing assets. Here are the popular regional stock indices: Asia: S&P Asia 50 index, FTSE ASEAN 40 index, and Dow Asian Titans 50 index. Latin America: The S&P Latin America 40. Europe: FTSE Euro 100, Euro STOXX 50, and S&P Europe 350.
- National Stock Market indices: National indices offer market exposure to individual countries. Often, the equities in these indices mainly comprise large cap stocks. However, when a country lacks the largest companies, the considered equities are the small-cap stocks. In the UK, for instance, FTSE 100, FTSE tech Mark, and FTSE All-Share are the leading national indices.
Major Indices in the World
- Nasdaq-100 Index: Nasdaq is one of the world’s largest and most-watched indices in the financial markets, according to Investopedia. The index comprises shares of the largest technology companies traded in the Nasdaq market system. Here, investors can invest in shares of giant tech companies, such as Microsoft, Apple Inc., Facebook, Amazon, Tesla, and Alphabet (Google). While the index has more than 2,500 stocks, the Nasdaq composite is the main index. The stocks traded on this system contain ticker symbols with four characters. For example, TWTR represents Twitter while MSFT represents Microsoft.
- Dow Jones Industrial Average: Named after Charles Dow and Edward Jones, traders refer to this popular index as the Dow 30, Dow Jones, or just the Dow. Today’s Dow Jones incorporates 30 large companies, especially blue chips, listed on the United States stock exchange market weighted by their share prices. The Dow index today shows the dynamics of the industrial sector in the US. It’s one of the crucial benchmarks for the US economy and market performance. Some of the giant companies’ stocks listed in this index include; IBM, Coca-Cola, General Motors, Microsoft, and Intel.
- S&P 500 Index: Also known as “the market” or “the S&P 500”, this index is a commonly known large-cap segment of the United States domestic share market. It represents roughly 500 US-based companies and covers approximately 75% of the US entire equity market. It’s regarded as a major index because its stock prices movement affects other countries’ stock indices. Large tech companies, such as Apple and Microsoft, form a considerable part of this index. Other top corporations on the index include Google, Facebook, Amazon, Johnson & Johnson, Visa, and Berkshire Hathaway.
- FTSE 100: The Financial Times Stock Exchange (FTSE) is a top index in the United Kingdom. It comprises 100 companies with the biggest capitalization in the London Stock Exchange. This index includes companies operating in over 150 countries worldwide. BP, the Royal Dutch Shell, and HSBC form a large part of this index.
- The Russell 2000: It represents the small-cap share of the equity market and covers roughly 2,000 of the smallest organisations depending on the market capitalization-weighted index. “The market is designed to offer an unbiased and comprehensive small-cap barometer”, says Russell Investments. The index is redefined yearly to prohibit companies with high stock index prices from distorting the performance of small-cap stocks.
- The Russell 3000: Commonly known as the “broad market index”, this index represents roughly 3000 stocks, and it’s different from the Russel 2000. It analyses the performance of the biggest companies in the US. ETFs and mutual funds that trade in a way that imitates this index can be useful in building portfolio exposure, as portfolio managers need to include other categories like foreign stocks, bonds (fixed income), and small-cap stocks.
Lastly, the increase of smart beta index has greatly increased the number of total-market indices. Simply put, smart beta indices are seen as passive indices built with fundamental screens or special characteristics to enhance the quality of the index constitution. Listed below are the top three Advisors Asset Management (AAM) smart beta index funds:
- S&P 500 High Dividend Value ETF
- S&P Emerging Markets High Dividend ETF
- S&P Developed Markets High Dividend Value
It’s also worth mentioning ethical stock market indices, which are indices created on the basis of social or environmental criteria. The world’s top ethical indices include Dow Sustainability, FTSE4Good, and MSCI.
Why Trade Indices?
Trading indices is popular among beginner and experienced traders as it can be useful for long-term trading and day trading. Some reasons for trading indices include:
- Indices have high liquidity that offers traders clear chart patterns and tight spreads.
- They allow traders to initiate trades when the price is rising and falling.
- They offer volatility.
- Different indices for different sectors and industries exist.
What Makes the Indices Market Fluctuate?
Here are the main aspects that move the indices market:
- The companies that form the index
- Economic data. For instance, the UK’s economic data will cause changes to FTSE 100.
- Politics, especially trade regulations and wars.
Trading Tips for Indices
Index trading is similar to trading other assets in the financial market. Traders can include the following strategies when investing in :
- Use a risk-reward and expense ratio before initiating a trade.
- Be watchful of major economic data releases.
- Regularly update trading skills and knowledge
How to Read Stock indices
Every index contains a base value that denotes the index’s weighted average of the stocks. When reading indices, one needs to assess how the percentage fluctuates over time instead of analysing its value. This way, it becomes simpler to tell whether indices are volatile and whether they are trending correctly.
In summary, plenty of indices exist, and each comprises massive and valuable information. The crucial thing to consider when trading indices is the stocks they track. In such a case, it’s much easier to inspect the market performance and understand the data of the particular index.