Introduction to Indices - Learn Indices Trading Guide

Stock Indexes trading is gaining popularity among online investors and Stock indices trading charts are now provided alongside other financial instruments provided by many brokers. To train our beginners who want to begin investing in these financial instruments we have prepared a tutorial for learning how to trade these financial instruments. Just like Forex, CFDs, Metals and Oil; these financial instruments are also leveraged products - this is one of the reasons why these instruments have gained a lot of popularity.

What is a Stock Market Stock Index?

A stock market index tracks the performance of a group of stocks selected from a particular stock exchange market - for example in the UK, FTSE 100 index tracks the performance of top 100 companies listed on the London Stock Exchange Market.

Most popular indices track the performance of blue chip companies in the various stock exchange markets around the world. The stocks of these blue chip companies are the most traded in any particular exchange market because the blue chip companies represent the best companies in a particular country - therefore this means these indices are the best tools for analyzing performance of any particular stock exchange market.

Indices

As international investors and traders we are interested in the stock market indices as financial instrument which can be traded for profit. Stock indices are now some of the instruments provided by online brokers alongside Forex currencies. Just like in currencies leverage is also provided by brokers for use when investing in these instruments.

Stock indices have various advantages over Forex, these are:

1. Requires less capital than FX
2. Movements are based on stock market moves and have better trends
3. Moves are less volatile and more robust.

Let us explain each of the above in details:

1. Requires less capital than Forex

These financial instruments are traded in lots just like Forex, but the average capital requirement per lot is less for indices when compared to Forex. For example in Forex with leverage 100:1 a trader requires $1000 dollars to open one lot but for indices, one requires between $5 & $150 to open 1 lot - depending on the stock index that's being transacted. The table below shows the specifications for the most popular ones - 14 in number.

1. Australia ASX 200

   Symbol - AUS200Cash

   1 Point - 0.1

   Pips Value - AUD 0.1

   Margin per Lot - AUD 70

2. EU EURO STOXX

   Symbol - EU50Cash

   1 Point - 0.1

   Pips Value - € 0.1

   Margin per Lot - € 40

3. France CAC 40

   Symbol - FRA40Cash

   1 Point - 0.1

   Pips Value - € 0.1

   Margin per Lot - € 40

4. Germany DAX 30

   Symbol - GER30Cash

   1 Point - 0.1

   Pips Value - € 0.1

   Margin per Lot - € 85

5. Hong Kong Hang Seng 50

   Symbol - HK50Cash

   1 Point - 1

   Pips Value - HKD 1

   Margin per Lot - HKD 450

6. Italy FTSE MIB 40

   Symbol - IT40Cash

   1 Point - 1

   Pips Value - € 1

   Margin per Lot - € 250

7. Japan Nikkei 225

   Symbol - JP225Cash

   1 Point - 1

   Pips Value - JPY 1

   Margin per Lot - JPY 90

8. Netherlands AEX 25

   Symbol - NETH25Cash

   1 Point - 0.1

   Pips Value - € 0.1

   Margin per Lot - € 5

9. Spain IBEX 35

   Symbol - SPAIN35Cash

   1 Point - 1

   Pips Value - € 1

   Margin per Lot - € 140

10. Switzerland SMI 20

    Symbol - SWI20Cash

    1 Point - 0.5

    Pips Value - CHF 0.5

    Margin per Lot - CHF 100

11. UK FTSE 100

    Symbol - UK100Cash

    1 Point - 0.1

    Pips Value - £ 0.1

    Margin per Lot - £70

12. USA S&5 500

    Symbol - US100Cash

    1 Point - 0.1

    Pips Value - $ 0.1

    Margin per Lot - $30

13. USA NASDAQ 100

    Symbol - US30Cash

    1 Point - 0.5

    Pips Value - $ 0.5

    Margin per Lot - $150

14. USA Dow Jones 30

    Symbol - US500Cash

    1 Point - 0.1

    Pips Value - $ 0.1

    Margin per Lot - $12

From the above table you can see that the required margin per lot is varying from about € 5 up to € 250.

The value per pip varies from $ 0.1 up to € 1 per lot. In Forex the value per pip for 1 lot is $10 dollars but for indices the value per pip is much smaller. However, total pip movement for index is far greater than that of average an Forex Currency Pair. Therefore even though the pip value is smaller the average stock index movement per day is about 500 - 2000 points.

2. Better trends because movements are based on stock market moves

The movements of indices tend to be much more predictable than that of currencies. This because historically there is one constant in the stock market - Stock prices always go up over the long term - this means that because these indices track the movement of stocks, then over longterm the market trend of these instruments will keep heading upward. Of course when there is economic recession the stock market index trend will tend to move lower - therefore most of the times as investors we want to focus on trading when there is economic growth all over the world and the stock market indexes are moving up, because people have money to invest & they are investing in stocks, therefore moving the trends higher.

Because the trends will most of the time be upwards, as a trader you want to be more on the buy side than the sell side - because generally people keep buying stocks. This isn't to say that there cannot pullback a bit & retrace a little, it just means that the odds of making money when you buy are better than when you sell, especially if you hold your trades for some time. Even if you are a scalper, it is best to wait & scalp the upward market moves as they are more profitable and in line with the trend. Remember the pull-backs are just be short term market moves. These pull-backs come about when investors are taking profits therefore selling some of their stocks - thus causing these short term retracements.

The other factor that makes the indices keep heading up is that, stocks being tracked are blue chip companies, most lucrative companies selected from the most lucrative industries and sectors of their respective economy. This means these are the most lucrative stocks in any particular stock market exchange - & in general the best, their share price will keep going up because these companies keep turning a good profit. Therefore even the indices tracking these top stocks will generally keep heading up.

Another thing also is that companies listed on an index are constantly getting reviewed, if a company stops meeting the growth & profitability requirements it's removed from the index & another profitable company replaces it, therefore meaning these indices will keep heading up as at any given time they represent the best companies.

The best strategy for trading these indices is to wait until there is a pullback, then buy into that dip wait out for market to move up a few days, take profit, wait for another price pullback, buy & keep repeating this strategy. If you find the price somewhere at the top after an extended move upwards always wait for a pullback before buying, there is always one or two good pull-backs every week where one can buy into an index & ride the market trend for some profit. Please remember this strategy - it will be the difference determining if you make money or not when it comes to these financial instruments.

Moves are less volatile and more robust

This point is based on the fact that index are based on stocks which are picked from the best performing companies from the very best sectors and industries in an economy - & the indices provided are selected from the countries that makes up leading economies - US, Japan, UK & EU Countries.

The above stock index therefore represent the best companies, from the best sectors of their economy, chosen from the top leading economies in the world. Therefore their movements are more robust & less volatile - mostly upwards trends.