Introduction to Stock Index - Learn Guide

Stock Index trading is gaining popularity among online investors & Stock Index charts are now provided alongside other trading instruments provided by a lot of brokers. To train our beginners that want to start and begin investing in these financial trading instruments we have prepared a tutorial for learning how to trade these financial trading instruments. Just like Forex, CFDs, Metals and Oil; these financial trading instruments are also leveraged products - this is one of the explanations why these instruments have gained a lot of popularity.

What's a Stock Market Stock Index?

A stocks market index tracks the performance of a group of stocks & shares selected from a specific stock exchange market - for example in the UK, FTSE 100 index tracks the performance of top 100 companies listed on the London Stock Exchange Market.

Major stock indexes follow how top companies perform in exchanges worldwide. Shares of these top companies trade the most on each exchange. They stand for the strongest firms in a country. So these indexes offer the best way to check how a stock market is doing.

Indices

As investors and traders from around the world, we're interested in stock market numbers as something we can trade to make money. Brokers now offer these numbers to trade, along with currencies. Just like with currencies, brokers also let you use leverage when you invest in these trading options.

Stock have various advantages over Forex, these are:

Requires less capital than Forex
Movements are based on stock market heads and have better trends
Moves are less volatile and more robust.

Let us explain each of the above in details & particulars:

1. Requires less capital than Forex

These financial trading instruments are traded in contracts/lots just like Forex, but the average capital requirement per lot/contract is less for indexes when compared & analyzed to FX. For exemplification in Forex with leverage 100:1 a trader requires $1000 to open 1 lot but for indices, one requires between $5 & $150 to open 1 lot - depending on the stock index that is being traded/transacted. The table below illustrates and shows the specifications for most popular stock indices - 14 in number.

Australia ASX 200
Symbol - AUS200Cash
1 Point - 0.1
Pip Value - AUD 0.1
Margin per 1 Lot - AUD 70
EU EURO STOXX
Symbol - EU50
1 Point - 0.1
Pip Size - € 0.1
Margin per 1 Lot - € 40
France CAC40
Symbol - FRA40
1 Point - 0.1
Pip Value - € 0.1
Margin per 1 Lot - € 40
Germany DAX30
Symbol - GER30
1 Point - 0.1
Pip Size - € 0.1
Margin per 1 Lot - € 85
Hong Kong HangSeng 50
Symbol - HK50
1 Point - 1
Pip Value - HKD 1
Margin per 1 Lot - HKD 450
Italy FTSE MIB 40
Symbol - IT40
1 Point - 1
Pip Size - € 1
Margin per 1 Lot - € 250
Japan Nikkei 225
Symbol - JP225Cash
1 Point - 1
Pip Value - JPY 1
Margin per 1 Lot - JPY 90
Netherlands AEX 25
Symbol - NETH25
1 Point - 0.1
Pip Value - € 0.1
Margin per 1 Lot - € 5
Spain IBEX 35
Symbol - SPAIN35Cash
1 Point - 1
Pip Size - € 1
Margin per 1 Lot - € 140
Switzerland SMI 20
Symbol - SWI20
1 Point - 0.5
Pip Value - CHF 0.5
Margin per 1 Lot - CHF 100
UK FTSE 100
Symbol - UK100Cash
1 Point - 0.1
Pip Size - £ 0.1
Margin per 1 Lot - £70
US S&5 500
Symbol - US100
1 Point - 0.1
Pip Value - $ 0.1
Margin per 1 Lot - $30 dollars
US NASDAQ 100
Symbol - US30Cash
1 Point - 0.5
Pip Size - $ 0.5
Margin per 1 Lot - $150
USA Dow Jones 30
Symbol - US500
1 Point - 0.1
Pip Value - $ 0.1
Margin per 1 Lot - $12

From the above table you can see that the required margin per lot/contract is varying from about € 5 up to € 250.

Pip values range from $0.1 to €1 per lot. In forex, one pip on a standard lot equals $10. For indices, the pip value drops much lower. Still, indices see bigger total pip shifts than most forex pairs. That means daily moves for stock indices often hit 500 to 2000 points, even with tiny pips.

2. Better trends because movements are based on stock market moves

Indexes tend to move in ways that are easier to guess than how foreign currencies move. That's because, in the history of the stock market, one thing stays true: Stock prices generally increase over a long period. Since these stock indexes follow how stocks move, the market trend for these things will usually keep rising over time. Certainly, when the economy is doing poorly, the stock market will usually go down. So, we often want to trade when the economy is growing worldwide and the stock market indexes are rising, since people have money to put in stocks, pushing market trends higher.

Trends in indices often head up. As an indices trader, lean toward buys over sells. People keep snapping up stocks. Pullbacks happen now and then. Prices dip a bit before climbing again. Buying gives better odds to profit than selling. This holds true if you keep trades open longer. Even scalpers should target upward moves. Those align with the trend and pay more. Pullbacks are brief. Investors sell to lock in gains, sparking short dips.

Another reason stock values keep rising is because the stocks being watched are from well-known and successful companies: these are the most profitable companies from the most profitable parts of the economy. This means that these are the best stocks on the stock market, and their prices will likely keep rising because these companies continue to make money. So, the indexes that follow these top stocks will also likely keep rising.

Furthermore, companies that are part of an index are always under review. If a company fails to meet the growth & profitability criteria, it is removed from the index and replaced by another profitable company, thus meaning that these indices will continue to climb as they represent the best companies at any given time.

The best way to trade indices is to wait for a pullback, then buy the dip. Hold as the market rises a few days, then take profits. Wait for the next pullback, buy again, and repeat. If prices sit high after a long up move, wait for a retrace before buying. Weekly pullbacks offer chances to enter and ride the trend for gains. Stick to this plan. It decides if you make money on these trading tools.

Moves are less volatile and more robust

This point is based on the fact that index are based on stocks which are picked from the best performing companies from the very best sectors and industries in an economy - & the indices provided are chosen and selected from the countries that makes up leading economies - US, Japan, UK & EU Countries.

The aforementioned stock index includes leading companies from top business sectors within major world economies, resulting in more stable movements and reduced volatility - predominantly showcasing upward trends.

Learn More Lessons and Topics: