Stock indices serve as an ideal measure to know the general performance of the market as they tell us about the general state of the economy of a country or a particular sector, according to financial service provider easyMarkets.
They have the ability to make us see at one glance the movement of the majority of companies in the said market.
The current differences in the value of the stocks that make up the indices reflect the economic situation facing the financial world, and investors take advantage of the price changes of the various stock indices to obtain returns.
Before knowing how to trade cash indices , it is necessary to know what the indices are, which consist of the most liquid companies in a specific sector in a particular country and are formed from a set of stock values listed at that time, that is, they represent the development of companies in a specific country and in a specific sector.
Success rates in trading are considered Indices are high because they provide an opportunity to trade in the financial markets with less risk than trading individual stocks.
Therefore, many investors prefer to invest in indices over individual stocks.
Stock indices serve as a reference to know the general behavior of a particular type of asset, and they are also used as a standard or basis for comparison to determine the relative profitability of fund managers and individual investors, for example: If an investor has achieved a return of 15 percent for a year, then it is in principle more than the number Acceptable, however, if in the same year the stock market index in which he invests increased by 30 percent, his relative performance would be quite mediocre.
easyMarkets suggests several types of stock indices
There are different classifications of stock indices, but the three most common classifications are as follows:
1- According to the geographical origin of its assets:
National indices consist of origins in the same country.
International indices consist of assets in one or more foreign countries.
Global Indexes is made up of assets from all over the world.
2- According to the type of companies that contain:
Sector indices It is made up of companies in a specific sector.
Cross-sector indices are made up of all types of companies.
3- According to the type of assets it contains:
Equity variable income indicators.
Fixed income indicators consisting of bonds and commitments of all kinds.
Commodity indices such as oil, gold, silver, and others.
Why invest in stock indices?
Surely you have already wondered why invest in stock indices when there are other more popular and exciting alternatives such as stocks, cryptocurrencies, or forex, we will give you five reasons to do so:
1- Diversified investment
The index is a conglomerate of stocks whose movement depends on the joint performance, and this means that once you invest in an index, you are really investing in the economic behavior of many companies and in the actions that consist of it. As an investor, you have the option of knowing those companies included in the different stock indices, so your choice will be Completely transparent, you can select an international stock index, a national index, or choose according to your sector of interest.
For example: the Nasdaq Index is one of the most popular indices of the year as it lists the top 100 most valuable technology companies in the United States.
If you are a low-cap investor and want to have an impact on the market, you can do that in a stock index instead of buying just one share of Tesla for example.
2- Less risk
The main stock indices reduce the risks significantly since they act as a measure of the performance of the best stocks, let us explain with an example: an investor likes to buy the cash shares of British banks such as Barclays or HSBC, in the event of a downturn in the banking sector, the investor will witness the loss of a large part of his investment, But what would have happened if that person had invested his money in the FTSE 100 (London Stock Exchange)?
The fall of the banking sector would not have affected the overall performance of the index much thanks to the fact that other companies with higher returns would have maintained it.
In general, indices are good at mitigating risk and although the gains are not instant, trading stock indices will always be safer.
3- It requires little capital
You can start your path as a stock investor with low capital indices because you can start your investment adventure with index funds or exchange-traded funds (ETFs).
However, theoretically with little money you can go in and get extra money step by step but keep in mind that many online brokers other than the fact that you can start your investments with little money have a minimum investment required so we recommend you check your financial goals before investment.
4- Low commissions
The idea of investing in stock indices will be based on the long term i.e., implementation of a pending strategy, which means that you do not have to buy, sell, and resell to make a profit.
By having zero sales movement and just increasing your position within the stock index, the commissions will be low so you will save money, similarly, it is easy to track the fees charged for the indices because there are few financial products that have a huge impact on diversification, i.e. you invest in a lot but you work in little.
5- Long-term sustainable growth
The true value of indices lies in the long-term investment, and due to their low risk and continuous growth, this is the reason why most investors take investing in indices as their retirement plan.
How to invest in stock indices?
Investing in ETFs is easy because they trade in a similar way to stocks, the first thing you should do is research the index you want to invest in, either because you like the index of that sector, country or market or because you have done a technical analysis and you see that it is doing well to enter.
Then you have to locate it in your broker, we have to do this step first because depending on the broker you may be surprised if after in depth study and calculating the risk and your site you find out that your broker is not negotiating it and you can’t access this product, if you are with a good broker you won’t have a problem And you can move on.
Now select your entry point, stop loss and target if it is for a short- or medium-term operation, and calculate your position size based on your risk and capital.
There are many ways to invest in stock indices, some of which are more difficult than others, but all have a high potential for profit, but most investors who want to take advantage of high leverage resort to financial derivatives such as binary options, futures contracts, or contracts for difference (CFDs). CFDs).
However, there are safer alternatives, for example exchange-traded funds (ETFs) or index funds, where you no longer must be tied to a specific date (as in the case of futures contracts).
If you are a beginner investor it must be kept in mind that every operation has its risks, fortunately reliable brokers have demo accounts so that they can learn and work with virtual money.