Indices differ from deliverable assets in the way that they are ‘virtual’ portfolios of securities. Investors trading indices focus their efforts on asset classes or segments of asset classes. The broad definition of an index is a ‘statistical measure of change in a securities market or economy’.
Types of indices
There are six broad brackets of indices, as follows:
- Capitalization indices
- Fixed income indices
- Residential property indices
- Sector indices
- Strategy indices
- Volatility indices
Benefits of trading indices
Rather than building a portfolio of individual stocks, investors often choose to work with indices instead. While a portfolio of stocks needs to be built manually, an index comprises a variety of instruments already which the trader gains access to. For example, the largest 500 companies in North America are tracked by the S&P 500. Indices are not usually influenced by movement of single stocks, but much wider market trends.
Key features of indices
The very nature of indices means that risk diversification comes as standard for the index trader. Rather than taking risks on individual stocks, the investor instead works with a wider-market risk. Along with benefiting a trading portfolio with true diversification, advocates of index trading believe that indices help them manage risks more effectively.
How to trade indices
Trading with indices bears many similarities to working with Spread Bet and CFD products. An index as a whole will move up or down just like an individual stock, enabling savvy investors to buy low and sell high. Projections with regard to index movement are based on the behaviour of the individual stocks that comprise the index, along with wider market pressures and influences.