What Are Indices?

Indices are a collection of stocks and instruments used to track the growth or trajectory of an industry or sector. These whole-sector tools allow us to look at how a chunk of the market is performing to better understand investment opportunities along with market fluctuations.

How are stock market indices calculated?

To better understand how indices are calculated, it is important to understand how they are constructed. Each exchange requires its listed companies to maintain a high standard of accounting and public reporting. Companies such as Standard & Poor’s (S&P), Xetra, Financial Times Stock Exchange Group (FTSE), and others review these published reports to audit the health and growth of publicly traded companies.

Can I profit from index trading?

Indices rise and fall on a daily basis. Calculated by grouping together similar companies, traders use these tools as whole market or sector indicators to better understand market movements. For example, after an announcement by Netflix, you predict that it will have a positive effect on the tech industry as a whole. You can open a Buy position on Maduro Invest’s US-Tech 100, hoping to profit from this index’s movement. If the index does indeed rise, you can close your position and profit from the difference between your purchase price and closing price. On the other hand, if the index falls and you close your position, you will incur a loss.

Benefits of index trading

Trading on indices can be an effective way to diversify trader risk, as it provides wider exposure when compared to trading on an individual stock. When trading on a stock, fluctuations in the stock price are based on a large number of factors such as performance, revenue, and confidence in their ability to produce exciting products. When trading an index, a handful of poorly performing constituent companies do not necessarily affect the index’s value one way or the other.