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Indices or market indices are statistical measures of a group of stocks that are taken as representative of a specific sector of the stock market. For example the “Footsie” or FTSE 100 index is made up of stock prices taken from the top 100 companies listed on the London Stock Exchange with the highest market capitalization. Let’s say the FTSE increased by 1%, this implies that the stocks of individual companies that fall under the FTSE 100 have also increased their market cap value by 1%. Market index reading is based on points. For example if the FTSE increased by 20 points, this means that its present value to the previous day’s trading is up by 20 points.show more
For investors, the FTSE 100 is considered the main indicator of the prosperity of businesses that are based in the UK. For investors, market indices are an important tool, as it is often used for comparative analysis on their stock investment portfolio. As mentioned earlier, market indices are used to indicate how well a sector of the industry is faring. So for example if the FTSE is falling and continues falling over the duration of a month, this could imply that some of the companies which make up the constituents of the FTSE index may be facing difficulties. Hence if the portfolio of the investor contains stocks of the FTSE constituents, he might want to reevaluate his investments in these companies and choose other sectors to invest in.
Why Trade Market Indices
The main reason why an investor would want to trade a market index over individual stocks is the time and money saved when investing in a particular sector. At the same time, an investor is able to diversify his trading risk and prevent the value of his portfolio from being affected by the decline of value of one or two stocks from the particular sector that he is investing in.
Of course when trading in any markets, the first thing that any investor has to do is to refer to his trading chart before deciding on his investment decision. For investment in market indices, trading is usually conducted over the course of the medium term. This means that the time frame of the indices charts used must be long enough to extend over the medium term. Hence, it is not surprising to find that most of the charts on indices are displayed against a background of the daily closing value.
Popular Market Indices
Not all market indices are given the same emphasis by traders. In fact some market indices are more popular than others. Below is a list of some of the major indices that are frequently traded by traders:
• Dow Jones
• Hang Seng Index
• Nikkei 225
• S&P 500
Regardless of what sector of the economy that an investor is interested in investing, market indices enable a investor to invest in an entire sector without having to purchase individual stocks thus saving a considerable amount of time and trading expenses.