A stock market index is a measurement of a compilation of shares, which tracks and assesses the performance of a particular market’s sector, region or country’s economy in general.
The majority of highly developed, as well as developing economies, have at least one financial index. For example, the S&P 500 index includes the stocks of 500 top-traded companies in the United States. Comprising 70% of the overall financial value of the US stock market, the index delivers a good view on the state of the American stock market as a whole.
Why trade indices?
Index trading is a relatively secure form of trading with integrated money management. The risks of trading indices are always lower than the risks of investing in individual stocks.
Indices are the least manipulative financial instruments. The price of an index changes according to the price fluctuations of the constituent companies that make up that index.
Embedded money management scheme. Trading indices, you simply don’t put all your eggs into one basket. With the NASDAQ 100 index, you diversify into the most-prominent American high-tech companies. Choosing CAC 40, you contribute to petrochemical industries.
Lower risks. Though indices can also be volatile due to factors like geopolitical events, economic forecasts and natural disasters, an index losing or gaining 10% is already a huge historical event that will often hit the news.
No risk of bankruptcy. Unlike an individual company, an index can’t go bankrupt. If a DAX 30 constituent goes bankrupt, it is replaced by the 31st company in the list of leading German companies. However, if you hold shares in this business, you’ll automatically lose your investment.
Benefit from the global economic situation. By investing in a basket of companies, you benefit from the positive or negative dynamics of the global economy. If one company fails, the index can still rise
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