What are Stock Indices ?

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A stock index is a group of stocks that can be bought or sold as a single tradable instrument. Now, some traders speculate on how the price of a single asset changes however, some choose to speculate with Stock Indices. As a group, stock indices can be used to indicate the health of an industry or even a country. Classifying stock indices, however, is a little more complex. Some indices, like the DAX 30 for example, is a group of the 30 top-performing companies in Germany. Classified as a ‘national stock index’ it gives an indication of the health of the German stock market.

However, stock indices aren’t only comprised of stocks being grouped together because of their geographical location. Some stock indices represent and track the performance of certain sectors of the market. For example, the Nasdaq 100 index, tracks the performance of all the companies listed on the Nasdaq exchange. Generally being technology-related firms, the Nasdaq gives an indication of the health of the technology sector in the US! Traders that speculate with stock indices are able to decide if an index will increase or decrease in value based on market sentiment.

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How to trade Stock Indices?

As stock indices are made up of groups of firms, there are many different factors affecting the price of the index. Simply, if the stocks that make up an index go up in value, then the price of the index will increase, and vice versa. Traders speculating with stock indices are able to decide if an index will increase or decrease in value based on market sentiment.

The price movement of an index is likely to be much smoother than other financial instruments, as one individual stock can’t bring about a huge spike in price. However, there is significant volatility in stock indices as they can reflect broad political and economic shifts.

Trader speculates, an Index will increase in value.

Stocks within Index increase in value, increasing Index value.

Trader earns profit.