This article encapsulates key details regarding stock market index trading, including useful trading tips and the best indexes to trade. After reading this blog post, you will be able to benefit from the top index funds such as NASDAQ, Dow Jones Industrial Average, etc.
Index Trading – The Concept
The idea behind index trading strategy revolves around buying and selling a basket of stocks. A smart and simple means of expanding your existing portfolio, this strategy provides you exposure to the overall market and enables you to think above and beyond the performance of a particular stock. Various rating agencies comprising several stocks form the stock index composition.
Popular Stock Market Indexes Worldwide
The top largest US stocks (in order of index weight) include Microsoft Corp, Apple Inc., Amazon.com Inc., Facebook Inc., Johnson & Johnson, JP Morgan Chase & Co, etc.
The biggest sectors in the S&P 500 stock composition consist of IT (25.5%), Healthcare (15.4%), Financials (10.9%), Communication Services (10.7%), to name a few.
Below are some of the national stock market indexes around the world that are worthy of a mention aside from those in the US:
- The Financial Times Stock Exchange 100 Index (UK)
- DAX Index (Germany)
- SSE Composite Index (China)
In addition to the above, the MCSI World Index and Euro Stoxx 50 Index are good examples of global and regional stock market indexes respectively.
Because of the fact that an index is a mere benchmark, direct buying of stock indexes is not possible. An Exchange Traded Fund (ETF) is considered to be a trusted method for index trading.
Stock Market Index Types
Stated below are the two major types of stock market indexes and how they are calculated:
1. Price-Weighted Index
This is a stock market index whose individual components are weighted according to their existing share price (e.g. S&P 500).
2. Capitalization-weighted index
Alternatively known as a market value-weighted index, this type involves components being weighted in accordance with the total market value of their outstanding shares (e.g. Dow Jones Industrial).
Effective Stock Market Index Trading Strategies
- In the event of any news breaking that heavily influences the stock index price, trade according to the consequence of the price reaction. If a major announcement leads to price closing at a certain extreme, the same direction will be followed up the next day.
- Sell stocks when the market is beginning to reveal the downtrend price structure.
- Look for 2-3 successive red candles and then wait for a pullback, which typically tends to last about 3 days. Should the fourth day break below the low of the third, hold back until the market goes above the fourth day’s open price.
Stock index trading is a steady method for those looking to invest their money. It is crucial though that the index instrument and contracts you opt for are in alignment with your risk tolerance and the size of your account. To learn the ins & outs of stock and cryptocurrency trading, become a member of the Rich Picks Daily trading club today.