Indices & Shares Trading

What Are Indices and How Do We Trade Them?

An ‘index’ in financial terms refers to a measurement of change in a given market. Indices are best thought of as sample groups of shares which, when viewed as a whole, provide insight into market movements and the trends influencing the market value as a whole. It’s worth noting that some indices, like the Dow Jones are ‘price-weighted’, meaning that companies with share prices of a higher value have a greater impact on the overall index’s price point.

How are indices traded?

Because indices comprise multiple stocks, the volatility of indices markets can be subject to high volatility. Because of the derivative nature of indices, they are only traded using products that reflect their performance, like spread bets and CFDs. Successfully trading on indices requires a strong grasp of the overarching market movements and direction, because you don’t have the freedom to analyse a single company. Instead, your trades are informed by multiple companies’ performance and price position. Similarly, some traders consider trading on indices to be more consistent than individual stock trading. This is because individual stock prices are much more likely to be subject to movements based on news than an index. If you imagine an index as the combined weight of multiple companies, the movements they make as a ‘unit’ are likely to be far more predictable than that of a single company.