A market index in its purest form is a metric or a portfolio that tracks a group of stocks. Market indices constitute of stocks of companies from various or a particular sector of the economy. Such pools of stocks are designed to assess the performance of a particular segment of an economy. In developed economies, a number of indices markets exist, consequently providing unique investment opportunities.
S&P 500 is one of the biggest market indices in the world by market capitalization. The index tracks the performance of the top 500 companies in the U.S in varying sectors. Similarly, the index constitutes 70% of the overall financial value of the U.S stock market, thus acts as a clear indicator of the U.S economy. FTSE 100 is another popular index that tracks the performance of the top 100 companies listed in the London stock exchange.
Why Trade Indices Markets
Investor’s trade’ market indices to diversify their investment portfolios. In contrast to buying a stock of an individual company, market indices make it possible to gain exposure to a wide number of companies in various sectors. For instance, the S&P 100 consists of the top 100 companies in the U.S, spanning various sectors of the economy. By trading market indices, you avoid the risk of putting all your eggs in one basket.
In addition to diversification, it is impossible to manipulate the performance of a market index. Companies can issue updates in a bid to manipulate the underlying stock’s performance. With market indices, that is not possible given that the performance of an index is dependent on the performance of a number of stocks.
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While individuals companies come with the risk of bankruptcies that can significantly affect the performance of the stock, the same is never a problem with market indices.
Market indices can be extremely volatile. However, they are less risky, given that no individual stock is always in control of the overall performance of the index. Likewise, market indices make it possible to benefit from various economic cycles around the world.
How to Trade Market Indices
One of the easiest ways to trade market indices is by leveraging contracts of differences offered by brokers. These types of contracts make it possible to benefit on price swings. Conversely, one can buy an index to benefit on its underlying price rising. Similarly, one can short the index to benefit on the price dropping.
Likewise, a contract of difference makes it possible to deal directly with a market broker and take whichever position be it on the long side or short side.