What are Indices?

How Are Indices Compiled?

An index is defined by its components, i.e., the stocks it is composed of. Indices can be broad-based and contain a wide range of stocks in an industry, for example, Technology, or they can be specific to a defined niche. The different types of indices include:

• Global Indices

Global stock market indices are composed of stocks from across the globe. An example is the Dow Jones Global Titans 50, which tracks 50 of the largest and most widely traded stocks on the NYSE, ASE, Nasdaq, Euronext, LSE, and Tokyo Stock Exchange. 

• Regional Indices

Regional indices are composed of stocks from a specific region, such as South America, Europe, or Asia. An example is the Euro STOXX 50, which measures the performance of 50 stocks across 11 countries in the Eurozone.

• National Indices

National indices are made up of stocks within a single country. An example is the ASX100, which covers the overall performance of 100 of the largest stocks listed in Australia.

• Sector Indices

These indices track the performance of selected stocks in a specific industry or sector. Some of the major sectors include: Energy, Technology, Financials, Industrials, Healthcare

Sectors can be as broad as healthcare or as niche as biotechnology. An example is the Global Cannabis Giants Index (BGCANG Index), which was developed to track the stock performance of the top 20 listed companies exposed to the cannabis industry.

Stock market indices are very popular, even though equities are not the only financial assets that can be indexed.

There are also indices available for assets such as: REITs (Real Estate Investment Trusts), Bonds, Commodities, Hedge Funds, And more…

The whole idea of indices is to provide a trader with overall exposure to specific broad or narrow segments of an economy or market.

How Are Indices Calculated?

Indices are compiled to provide liquidity, easy replicability, and the maximum desired exposure to the markets. There are always set criteria to determine stock inclusion or exclusion and its weighting in an index. The weighting refers to how much a specific stock contributes to the overall index.

In most cases, there will also be periodic rebalances to ensure that an index stays true to its objectives. A special mathematical divisor or multiplier may also be applied to ensure that the specific investing objectives of an index are realized.

The price of an index is dependent on its components. There are generally two methods of determining the stock weighting in indices:

1. Market Capitalization

A market capitalization-weighted index is designed to give higher weights to stocks with larger market capitalization. For instance, stock A, with a market cap of $10 billion, will have a more significant weighting in an index compared to stock B, which has a market cap of $3 billion.

Most major indices are compiled using this manner. Examples of capitalization-weighted indices include the S&P 500, TSX Index, and CAC40.

2. Price

A price-weighted index is designed in such a way that stocks with the highest prices have a bigger weight than stocks with lower prices, regardless of market capitalization. The DJIA (Dow Jones Industrial Average) is a popular example of a price-weighted index.

There are also other methods used to compile indices, such as:

• Equal weighting - An equal-weighted index gives equal weights to all stock components. So, if an index has ten components, then every stock has a weight of 10%.
• Fundamental weighting - A fundamentally weighted index gives higher weights to components that have better fundamentals. For instance, a stock may have a higher weighting in a fundamentally weighted index if it has better performance metrics such as price-to-earnings ratio, profit factor, and dividend payouts.

Most Traded Indices

What is Index Trading?

Traders speculate on whether an index will rise or fall and take a trade position. When buying an index, you will be exposed to the overall performance of its components without actually buying the individual stocks.

Traditionally, indices have been touted as passive investment vehicles and traded using various instruments, such as Index Funds and ETFs.

• Index Funds - Pooled investments designed to track a particular index's performance. They have a fund manager whose sole responsibility is ensuring the index is tracked efficiently to match returns. Most index funds tend to have a higher minimum investment requirement, while there are also management fees.
• ETFs (Electronically Traded Funds) - These are similar to Index Funds because they are also pooled investments that track the performance of an index. However, ETFs are available through exchanges and can be traded just like stocks. In essence, you can buy one unit of an ETF and gain exposure to all its components. The most significant difference between ETFs and Index Funds is that the former can be bought and sold throughout the day (just like stocks), whereas the latter can only be traded using prices set at the end of a trading day.

Index CFDs

Indices are also available for trading as CFDs. CFDs (Contracts for Difference) are financial derivatives (products) that allow traders to speculate on the price of an underlying asset without taking any ownership.

A trader speculates on the index's price by either buying or selling and can earn profits trading both rising and falling prices. CFDs are also leveraged products, meaning traders can significantly boost their exposure in the markets even with small capital amounts; however, leverage can also increase risk.

HubrisSpace offers a wide variety of Index CFDs covering many major countries, markets, and sectors. Some of the most popular Indices on HubrisSpace include: US500, US Tech 100, CAC 40, DAX 30, UK100, Nikkei 225, China A50, Cannabis Index, and many more…

What Moves Index Prices?

Index prices are determined by the price changes of their components. This means there's a strong correlation between the index's performance and the prices of the leading constituent stocks. Some of the factors capable of moving index prices include:

• Overall Market Sentiment

The structure of indices allows them to serve as stock market benchmarks. Because they are composed of multiple stocks, they tend to reflect the overall sentiment in the market. If the market is generally bullish, an underlying index will tend to see its prices rise and vice-versa.

Some of the factors that can influence market sentiment include Economic factors such as wages and inflatio, Company news reports, Central bank announcements, Interest rates.

• Company News

News about companies with significant weighting within an index can influence its overall price direction. Some of the most impactful company news include: Earnings reports, Profit forecasts and warnings, Mergers and acquisitions and Changes in management.

• Index Rebalancing

Most indices are rebalanced periodically. This rebalancing can see new companies included in the index while others are dropped. This rebalancing may also include an increase or decrease in the weightings of specific components within the index.

The period from pre-announcement to the effective rebalancing date and the post-rebalancing period can be very volatile for indices' prices, depending on the expected events.

• Sector Performance

The performance of a sector can influence the overall performance of an index. For instance, Technology has a sector weight of about 27% on the S&P 500. If the sector faces tough economic conditions and tech stock prices decline sharply, this will also trigger price losses on the S&P 500.

• Commodity Prices

Commodities support various companies' economic activities. Many indices also include the stocks of commodity companies. For instance, the UK FTSE 100 has about 13% of its weight in energy. Therefore, changes in the commodity market can influence the overall price of the index.

• Political Events

As broad benchmarks, indices are vulnerable to major political events such as elections, trade wars, or cross-country conflicts. For instance, the UK Brexit event triggered volatility in the UK indices market.

Why Trade Indices?

Indices offer several practical advantages to traders. They include:

• Easy Diversification

Indices provide a quick way to diversify your portfolio. For example, by trading the S&P 500 index, you are effectively exposed to stocks of multiple top companies such as Apple, Amazon, Tesla, Meta, Visa, etc. There is, therefore, no need to buy all these stocks individually. 

• Broad and Targeted Exposure in the Markets

Indices allow traders to gain the kind of exposure they desire in the markets. For example, you can trade a national index such as the ASX200 to gain exposure to the Australian or even Asian economies. Alternatively, you could buy a smaller niche index, such as commodity indices, to gain exposure to the oil and gold markets.

• Clear Price Trends

Indices tend to have smooth and more predictable price behaviours. Because the number of stocks impacts the overall price, there is generally no danger of sudden huge price swings.

Only significant events that impact the overall markets will result in choppy price action, such as the COVID pandemic, which sent markets spiralling.

Index trends also tend to be long-term, making it easier for traders to apply an appropriate trading strategy at any given time. 

• High Liquidity

Thanks to consistent demand and supply, indices are highly liquid financial instruments. This high liquidity ensures that they can be actively traded throughout the relevant trading sessions with low spreads and transparent prices.

• Vast News Coverage

Because indices serve as benchmarks, they are some of the most widely covered financial instruments in the news. It is generally very easy to find information about any major index.

This vast news coverage also makes it easy for a trader to get clues about an index's overall sentiment and identify important technical and fundamental insights.

• Benchmarking

Traders can also use indices for other purposes, such as gauging market sentiment, assessing investor confidence, and evaluating the risk/reward of a sector or industry. Some traders use indices to model their personal portfolios and to benchmark the performance of stocks in their respective sectors.

Your Next Step in Trading Indices is here! You know the basics, now let’s build on that. Discover advanced tips and strategies in our "How to Trade Indices" guide. Learn how indices are traded, what affects their prices, when is the best time to trade them, and analyse a sample index trade with outcomes! We make learning Indices trading simple and effective.

Why trade Indices with HubrisSpace?

• Global Regulation - HubrisSpace is licensed and regulated in many top jurisdictions worldwide. This means you can trade indices with maximum peace of mind, knowing you are trading with a reputable and regulated broker.
• Multiple Trading Platforms - Enjoy the flexibility of trading indices with our various convenient platforms including MT4, MT5, WebTrader, and HubrisSpaceGO.
• CFD Trading - Trade index CFDs and benefit from leverage of up to 10:1. With index CFDs, you can capitalize on both rising and falling markets.
• Comprehensive Educational Resources - Our Education Centre offers plenty of educational resources to help you build and improve your index trading education and skills. You can also learn about the characteristics of different indices and the best strategies to trade them.
• Favourable Trading Conditions - Trade your preferred indices with transparent prices, low spreads, and fast execution at all times.
• Practical Trading Resources & Tools - Utilize HubrisSpace’s handy trading resources such as Trading Central to identify more opportunities in the markets, plus AvaProtect can reduce risk exposure.
• Excellent Customer Support - Contact our professional and responsive customer support team to get prompt and professional assistance.
• Demo Account Trading - Use your HubrisSpace demo account to test, practice, and refine your indices trading. Then, switch to your real money account and start earning.

Ready to trade Indices? Open an HubrisSpace account now!