An index is a portfolio of stocks that represents a particular market or market sector. Most major economies as well as developing economies have at least one financial index.
The most famous is American Dow Jones Industrial Average (DJIA), it is comprised of stocks from 30 of the largest companies in the US, representing the condition of US stock market as a whole.
The value of an index is usually described in terms of a number of points, its value generally represents a weighted average of the current values of its component stocks. This means that the changing value of an index from one day to the next reflects the fluctuating values of the individual stocks that it is made up of, and is why an index can be a good representation of the state of a country’s economy or of a specific industry.
To trade indices, traders can go long on a particular index if they believe that stocks in that market are likely to increase overall in the future, or go short on an index if they predict that the index is likely to drop in value. Understanding the stocks that make up an index can be an effective way of analysing an index. Different indices can have a particular focus on certain types of stocks or market sectors. For example, the NASDAQ index mostly consists of technology stocks and so can generally be seen as a measure of the performance of the technology industry. Monitoring indexes and noting their movements over time can help inform traders about investors’ attitudes towards a range of companies and market sectors.
Some widely traded indices include:
- - The S&P 500 and Dow Jones (New York City)
- - The FTSE100 (London)
- - The DAX30 (Frankfurt)
- - The Hang Seng (Hong Kong)
- - The Nikkei 225 (Tokyo)
- - The Shanghai Composite (China)