Welcome to the market indices section of the website. Here you will find articles on the uses and basics of market indices as a trading type. We’ll also cover how to trade market indices in your every day trading.
What are Market Indices?
It’s likely that you are familiar with financial assets like stocks, commodities and currency pairs which are often traded in the financial markets and spoken about regularly. But there is another type of financial instrument called market indices which are also commonly traded in the financial market but perhaps may not be so familiar to newer traders. It is important to know about though so be sure to read on.
Market indices are actually a statistical measure of the performance of a market sector such as the manufacturing sector or the technological sector. It is a virtual portfolio or basket of shares which are representative of the market sector which the index is intended to measure. So when people say things like “The stock market is doing great”, they are actually referring to how well the market index is doing. Apart from providing investors and traders with a quick overview of the health of the markets, indices are also an efficient way to trade the financial markets.
Benefits of Binary Options Market Indices
Traditionally if you wanted to invest in the stock market, you could only purchase stocks of individual companies. This is not only time consuming but also costly. With market indices, you can spread out your investment over the entire sector reducing trading costs as well as trading risks.
Another benefit of trading market indices is the fact that you can trade the indices market on a 24 hour basis even when some of the stock market exchanges around the world are closed. But the main benefit of trading market indices is the fact that indices generally behave in accordance to technical patterns and levels. So this makes analysis of the price movements easier and more accurate.
Factors Affecting Indices
Because the makeup of a market index is based on its constituents which are stocks of individual companies, we need to look at the same factors which can affect stock prices.
These factors consist of:
- Market Sentiment
Generally, the more optimistic the market is feeling, the more bullish or positive prices will be. This in turn will push up the performance of the market index.
- Stock Ratings
If an investment rating agency upgraded the stock rating of companies in a particular sector, then the performance of the index for that sector will also improve as a result. The opposite holds true when the investment rating is downgraded.
- The Price of Crude Oil
Crude oil prices have a huge impact on market indices because fossil fuel is used to power the various sectors of the economy. So if crude prices rise, then it becomes more costly to produce goods and services in the economy as a whole.
- Employment Data
This factor is closely related to market sentiment. The more positive the employment data, the more buoyant is the market sentiment.
- GDP Figures
The GDP figure of a country’s economy indicates the total value of the goods and services produced within the economy. A positive GDP growth rate shows that the economy is expanding which in turn means more investment opportunities for investors.
In addition to the main factors listed above, the performance of a market can also be affected by other ancillary factors such as:
- Corporate Earnings Reports
- Geopolitical Scenarios
- Housing Data
- Manufacturing Data
If you are new to trading market indices, it may seem confusing and overwhelming initially as you have no idea where to begin. Rest assured that if you trade market indices with binary options, the entire process is simplified immensely. All you need to do is just to remember that:
- Not all news is market worthy and will not affect the price of a stock and consequently the market index. What is more relevant is the weight the trading community places on the news as it is the forces or sentiment behind these traders that drives the price of a financial instrument.
- The smaller the number of components in the makeup of an index, the more sensitive it is to the changes of components’ prices.
- A market index measuring a developed economy and developing economy do not move in the same manner or are affected by news with the same degree of impact.
In addition, it is always prudent to check history to see if a market index behaves in the same manner given the same circumstances. Also, check the trading hours to see if the market index that you are interested in trading is available during the time that you want to trade.
Key Indices Traded in the Binary Options Market
Typically, you will find more than a dozen different types of market indices that are available for trading with most binary option brokers. Nevertheless as mentioned earlier, not all market indexes are created equal. Some are more popular as well as more frequently traded than others. Hence, if you want to specialize in trading market indices, it is always better to trade in indices which have more market activities as this will offer you more profitable trading opportunities. Some of the indices which you can consider trading can be:
- CAC 40
Short for “Cotation Assistée en Continu”, this is the stock market index for the French stock exchange. It measures the performance of the top 40 stocks out of 100 highest market capitalized stocks on the Euronext Paris.
The DAX measures the performance of the stocks of 30 major German companies which are traded on the Frankfurt Stock Exchange.
- Dow Jones Industrial Average
Often just known as the Dow Jones, this index is the second oldest index for the U.S financial markets and measures the performance of 30 major companies that are traded on the New Stock Exchange.
- FTSE 100
Affectionately known as the “Footsie’, the FTSE 100 comprises of stocks of 100 companies with the highest market capitalization that are traded on the London Stock exchange.
- HANG SENG
The Hnag Seng Index is made up of stocks from 50 companies that are listed on the Hong Kong Stock Exchange. These companies also represent roughly 60% of the total capitalization of the Hong Kong Stock Exchange.
This market index track 10 of the most liquid stocks that are listed on the MICEX-RTS exchange in Moscow, Russia.
- NIKKEI 225
Also known as the “Nikkei”, this index measures the performance of the Tokyo Stock Exchange. Its makeup is quite similar to the Dow Jones Industrial Average and hence sometimes resulting it being referred to as the “Nikkei Dow Jones Stock Average”.
- S&P 500
This is one of the major market indices in the U.S which consist of stocks from 500 companies which are listed on the New York Stock Exchange and NASDAQ. Because of its diversity, it is said to be the most representative of the U.S stock market.