In index trading, traders can speculate on whether an index will rise or fall without actually buying shares. A trader can buy or sell an index just like what they do in stocks, currencies, or commodities. Just like in individual equities, earning a profit happens when a trader decides to “sell” an index at a higher cost than its initial “buy/cost” or buy an index back at a lower cost than the original price it was sold for.
Individual shares of an index contribute to the computation of the total value. The rise or fall of the value will depend on the performance of the collective stocks. Robert Peter Janitzek explains that if the index goes up, more investors will buy instead of sell resulting to the increase of share prices. Conversely, if there are more traders selling than buying, the value of the index will fall.
Index vs Equity Trading
While the value of stocks can provide traders with an insight on the financial state of a certain company, indices serve as a good picture of the nature of markets and market sectors as a whole. It is important for you to monitor the events that will have an impact on the value of an index.
Robert Janitzek reveals that with equities, it would be best to keep track of company-related news as well as news from similar companies, such as mergers and acquisitions. Such factors can affect the movement of stock prices, either suddenly or dramatically. While trading indices still exposes a trader to risks, it is at a much lower level.
A Volatile Market
Indices are composed of a large number of stocks and constant movement of share prices making it extremely volatile. It is worth noting, however, that it is uncommon for all the stocks listed on an index to encounter major movements towards the same direction at the same time. When trading on indices, it is rare for indices to move by more than two points daily. But these instances can happen such as during the 1987 market crash.
Connecting Currencies and Indices
If you would be trading on index, it would be wise to also track Forex rates. There are times when a weak currency can cause a rise in index value and vice versa. There are instances when the decline in a currency can influence the rise of an index. The economy of the country of that currency, the exchange rate, and buying and selling actions can impact your capability to make a profit.