Indices is just a fancy way of pluralizing “index.” Which leads to the question … how can an index, much less several of them, impact your trading?
Let’s take a look at how it all works.
In this post, we’re going to demystify indices by defining what they are, explaining how they work, and offering tips on how to incorporate them in your stock portfolio.
Indices is a group term for more than one stock index. Which leads to the question …
An index is a means of measuring or keeping track of something. You’ll see indices all over the place — not just in the stock market. You’ve definitely seen an index in a book, for instance.
A stock market index is a means of measuring change within the market. It’s typically composed of a hypothetical collection of securities. They act as a benchmark for a particular sector or market; there are both U.S. indices and foreign indices.
Even if you think you don’t know anything about stock indices, chances are you already have some measure of familiarity.
You’ve probably at least heard of the S&P 500, the Dow Jones Industrial Average, or the Nasdaq Composite. But in case you don’t actually understand what they are, let’s take a look at some of the biggies.
Also called the Dow Jones or just the Dow, this is an index that measures how 30 large cap companies on major U.S. stock exchanges are performing. It’s a commonly followed index.
This index is weighted by market cap, and represents more than 3,300 equities on the Nasdaq. There are criteria for the equities — for example, it includes ADRs (American Depositary Receipts) and REITs (Real Estate Investment Trusts), but no derivatives, funds, or ETFs. It’s also not limited to companies headquartered in the U.S., which sets it apart from some other indices.
This is another index that’s weighted by market cap. This one acts as a benchmark of the entire U.S. stock market, measuring the performance of 3,000 of the biggest companies as defined by market cap.
Also just called the S&P 500 or just the S&P, this is an index that measures how 500 large cap companies listed on major U.S. stock exchanges are performing. It’s one of the most-followed indices and is largely viewed as a good representation of the overall U.S. stock market.
This is important to know: You can’t trade or invest directly in indices.
Remember: they’re a hypothetical portfolio, not an actual vehicle for investment. So to say you’re “trading indices” is a bit of a misnomer, because you’re not investing directly in the index. However, it isn’t false because there are specific ways to trade indices.
No, you can’t directly trade an index. However, there are funds that have been created that track their performance by combining a copycat portfolio of stocks like the ones found on an index, giving the ability to invest in its performance.
So when people say “trading indices,” this is what they’re referring to, rather than buying into an index directly.
How about an example? One big index fund is the Vanguard S&P 500 ETF. This ETF tries to copycat the S&P 500.
Why trade indices? Here are some of the draws:
Consider this: a stock could easily go up — or DOWN — 30 or 40% per day. This means that gains could be big, but so could losses.
Indices aren’t as volatile. If an index gains or loses 10%, it’s a massive deal — it doesn’t happen often. So indices offer stability that some investors like.
Since trading indices involves buying into a fund, there’s some built-in diversity. You’re investing in a number of companies at once. If one of the companies starts having trouble, oftentimes the other companies will help balance things out. This tones down the risk.
In reading about indices, you might be intrigued by the idea of trading them … But also totally overwhelmed about how to do it effectively.
fractalerts can help. This proprietary algorithm-driven system was specifically built to process mountains of market data to figure out predictable patterns for profitable trades.
This system has been used by banks, fund managers, and institutional investors to drive incredible gains across various markets including commodities, Forex … and indices.
Now, this system is available to the public.
fractalerts goes through data like price action, volume, momentum and more and processes the data to create complex matrices to identify patterns that would be — to put it mildly — highly difficult for the average trader to detect.
When a pattern is found, it triggers an alert. These represent actual trades that the fractalerts team will make, about 12-24 hours before execution.
As a subscriber, this gives you time to look it up and do your own research and make your own trading decisions. In short — you can act rather than just react!
Trading indices offers a number of advantages and a great way to diversify your portfolio. However, like any other type of investing, it’s important to get educated on how the process works before you dive in.
Of course, even educated traders could use a little help every now and again. fractalerts can help do some of the heavy lifting by using math and science to identify the most promising trades. Subscribe today!
Have you ever traded indices?