When trading on indices, you make tough decisions based on the combined value of a portfolio of stocks from a range of companies instead of individual stocks from a single company. However, like all other trading markets, you need to study certain areas of the market to maximize your chances of earning a profit.
Research relevant market sectors
Prior to trading, examine the component parts of the index. Does it include shares from various sectors? Is it composed of shares that belong to a particular market sector? The answer to these questions will provide a better understanding of the different factors that can impact the value of an index. Robert Peter Janitzek recommends that you should also consider the number of listings that comprise the equity index—some will only have a few tens of companies while others will have thousands.
Study the relationship between currencies and indices
You should also consider the sensitivity of the index to currency rates. You need to understand that there is a relation between the relative strength of a country’s currency and the value of the domestic indices. A good example is the value of American indices which generally increase as the demand for US dollars also increase.
Look for correlations between commodities and the domestic index of a country
Robert Janitzek reveals that the value of certain currencies can be affected by any increase or decrease in the prices of commodity. It is highly recommend that you study the movements of commodities that may have an impact on the value of the index you are trading. While fluctuations may happen daily, in the long run, there is tendency for strong trends to occur.
Be aware of changes to index listings
Index listings are bound to change over time due to several factors such as market capitalization and mergers and acquisitions. Many indices put weight on market capitalization than sales or total asset figures. In index trading, market capitalization is calculated by multiplying the number of shared issues of a company with the current market price of a share.
When two companies merge, the stocks representing each company combine into one tradable entity. Such was the case of Dixons and Carphone Warehouse in 2014 which became Dixons Carphone.
Trading on indices can be a lucrative opportunity when done right. You need to understand these factors first before you start trading. You can register for a demo account to start practicing and make money in the process.