Trading stock market indices is a popular tactic for portfolio diversification and can offer access to entire sectors and economies via a single position. There are a few different types of stock market indices and this guide will cover what those are as well as reference some common examples.
Read our indices trading guide
A stock market index is used to track the performance of multiple stocks, combining their prices into a single, tradeable value. They offer access to entire sectors and economies without the need to take up multiple positions, and they are a useful tool for diversifying your portfolio. Indices are used for benchmarking as they closely reflect the overall health of the economy or sector they're linked to. An index can be comprised of hundreds of different individual assets, including some of the largest companies in the world.
The various types of stock market indices can be classified in different ways, and some examples will fall into more than one category. But, broadly speaking, they are defined according to their weighting and their coverage.
The constituents in this type of stock market index are weighted by their share price, so those with a higher value have a greater influence on the performance of the index. The Dow Jones Industrial Average is a prominent example of a price-weighted index.
'Market cap' is calculated by multiplying a holding's stock price by its number of shares. This may factor in all the shares in a company – including those not available to the public, such as those held by employees, founders and governments. Or it may be done using the free-float adjusted market cap method, where only publicly available shares are taken into account.
Those with the largest market cap are given the greatest weighting, so any fluctuations in their value can have a significant impact on the performance of the index. The FTSE 100 is a notable example of this type of stock market index.
As the name suggests, all constituents of these indices are given equal weighting and therefore all have the potential to influence performance to the same extent. The Barron's 400 is an example of an unweighted stock market index, while there is also an unweighted version of the S&P 500.
Read our guide on how indices are calculated
These indices are designed to track the performance of certain industries, such as finance or technology. The NASDAQ 100 is a renowned example, with many of its constituents – including Alphabet, Apple and Microsoft – operating in the tech sector.
These indices reflect the stocks of individual or groups of exchanges. Some exchanges feature numerous indices with varying criteria, such as large or small cap. The NASDAQ 100 is one example of this type of index, tracking the largest non-financial firms on the NASDAQ exchange.
These types of stock market indices are useful indicators of a nation's economic health. For example, the Nikkei 225 is used as the pre-eminent benchmark for Japan.
Used to reflect the performance of stocks in a geographical region, such as the EURO STOXX 50, which features 50 of the largest publicly traded companies in the Eurozone.
As the name suggests, these indices are set up to mirror the performance of the stock market on a worldwide scale. The FTSE Global Equity Index Series features thousands of companies from dozens of countries.
There are many different types of stock market indices you can trade, but those listed below feature most prominently when it comes to news coverage and shaping the global financial landscape: · The S&P 500: Tracks the performance of the 500 largest cap companies in the United States. Constituents include Apple, Amazon and Tesla.
Read our guide to the most traded indices
With Tradu, you can trade index CFDs (Contract For Differences). Both are financial derivatives that enable you to speculate on the price of an index rising or falling without taking ownership of the underlying assets.
They're both leveraged products, which allows you to open larger positions for smaller deposits. This can have the effect of multiplying your profits, but it can also amplify your losses if the market moves against you, so you need to be aware of the risks involved. Find out more in our related guides:
It's important to adopt a clear strategy when trading indices or any other asset class. This will establish a framework from which you can set objectives, identify your limits, and make calculated decisions based on your analysis. Common strategies include:
Read our guide on index trading strategies
It takes only a couple of minutes to open a trading account with Tradu and through our proprietary platform you'll have access to hundreds of different index CFDs. Our tools and live charts will help inform your analysis and you'll experience a rapid trade execution. Sign up for your live Tradu account today and check out our related guides for further information on trading, index CFDs and more.