What is a Stock Index?
An index is similar to a basket of shares. It effectively provides a sample of a particular sector, industry or economy – and the idea is that the shares’ collective performance will give a general indication of the market they represent. Each index is calculated based on an average of a selection of share prices for each selected sector or market.
In addition to offering investors the opportunity to keep track of changes within the stock market in general, stock indices also offer a benchmark that can be used to assess the success of investment vehicles: including both share portfolios and mutual funds.
Why invest in Equity Indices?
There are many advantages to investing in stock indices. Generally speaking, stock indices are seen as a safer investment than attempting to pick individual stocks of certain companies. This is because an index will help to smooth the inevitable ups and downs that these firms are likely to experience. As such, you don’t have to spend your time trying to focus on who will win and who will lose. In addition, stock indices will also generally provide solid returns: and they will remove the need to constantly research the market.
However, share prices can fluctuate – meaning that buying shares is not without risk. This is where the stock indices market is often so intriguing as potentially a much safer investment that still offers significant returns.
What type of Stock Indices are there?
There are several different stock indices to choose from: here we take a look at a list of the different types of stock indices.
Global and World Indices:
These stock indices list some of the biggest companies in the world. Take, for example, the MSCI World Index. It measures 1,500 stocks taken from each developed market in the world. It is often seen as a benchmark for global stocks.
These are meant to show stock market performances within a certain country. They are supposed to reflect sentiment among investors within that market. One of the most famous examples is the FTSE100: it represents the largest 100 companies in the UK as listed on the LSE: the London Stock Exchange.
These are seen as more specialist forms of stock indices. They are used to track performances within specific industries and sectors. As an example, the Morgan Stanley Biotech Index can be used to track 36 firms within the US biotechnology industry.
In addition to stock indices, there are several other indices used for the financial markets which can impact the economy. These include: Currency indices, Commodity indices, Sentiment indices etc.
So which Indices should you watch?
Choosing which stock indices to follow will largely depend on your interest: there is an index which links to almost every sector of the stock market and the economy.
Of course, some are larger than others. The so-called “major” indices are the FTSE 100, the S&P 500, the Nikkei 225 and the Dow Jones Industrial Average.
Several of these main indices are offered by leading financial companies. They include the S&P 500, which is operated by Standard & Poor’s. Meanwhile, the FTSE100 is led by the Financial Times and the London Stock Exchange.
Is it possible to buy a share into a Stock Index?
It is not possible to invest into stock indices like individual shares as they are not products. Instead they simply provide information: so you can’t sell or buy part of an index, as an example. However, investors are able to trade indices using derivatives. These include options, futures and CFDs. Stock indices are actually the most well-known type of trading CFDs.
What is CFD trading?
CFD stands for Contract for Difference. It represents an agreement between parties to exchange the differences between the closing and opening prices of a contract. CFDs can be used to speculate on future movements of prices within the market: whether they are falling or rising. It is possible to go short – to sell – which will allow you to profit when prices fall. Or, you could potentially hedge a portfolio which is meant to offset a potential loss in the value of your investments. As there are more than 10,000 markets that can be traded, you can gain exposure within markets that you may not previously have had access to.
With so much to consider in the stock indices market, it is well worth seeking independent advice and leaving your investment strategy to a market professional that can carefully assess the options available to you based on your investment portfolio.