If you want to be a trader, then there are plenty of things that you must understand beforehand. We will continue to educate you in this article in order to make you a better trader. Today we will talk about trading indices – what it is and how to cook it correctly. Make yourself comfortable and enjoy reading.
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Complex Things Simply Put
Trading indices (also called stock indices) are indicators of the state of the stock market. A basket of the foremost liquid common stocks and bonds is used to calculate it. Indicators facilitate the determination of the present economic cycle, and state of the exchange. Simply put, this index measures the common amendment in the price of a specific group of securities.
Investors use these indices to assess current situation on the markets and to predict the results of future trading operations. Indicators are calculated for various countries, industries or for a precise group of securities – bonds, stocks, different assets.
These indices are divided into two most common groups according to the calculation method:
- Simple arithmetic means. This is when the prices of the shares included in the index are added up and divided by their own number. This is how the Dow Jones indexes are calculated.
- Weighted average – as a rule, by capitalization. With this calculation method, it is possible to weigh not only the prices of the shares themselves, but also their number (and, accordingly, their influence) in the market.
By geography, such indices can be:
- International – for example MSCI World (includes 6000 global companies) and S&P Global 100 (respectively, includes 100 largest companies in the world)
- National – for example Dow Jones Industrial Average, used on the New York Stock Exchange, FTSE 100, which calculates the index based on the 100 largest companies on the London Stock Exchange, and so on.
You can also invest in a stock index. To do this, for example, you can buy all the securities included in the index. Or by investing in investment funds, such as ETFs (Exchange Traded Funds), the portfolio of which repeats the composition of the corresponding stock index.
What should I do with this information?
Informed means armed. If you want to become a trader, such knowledge will be extremely helpful and you cannot do without it. Understanding stock indices will allow you to predict the behavior of the market and the feasibility of purchasing certain securities.
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