Want to learn how to trade indices? Indices trading is one of the fastest ways to get exposure to the broader market without having to choose individual stocks.
Investors who are looking to profit from general market trends or want to reduce their risk by hedging a portfolio can significantly benefit from learning how to trade indices.
The goal of this guide is to provide you with all the information you need to learn how to trade indices.
In the following paragraphs, you’ll discover what the main benefits of trading indices are, the most popular index trading strategies, whether trading indices represent a bullish or bearish strategy, as well as an extensive list of the 20 most popular indices on the market today.
We’ll also explain how indices trading works, why it works, the market cap, as well as the latest updates in the industry in 2024.
By the time you’re through with this guide, you should be well-equipped to know how to trade indices with the confidence and knowledge of an expert in the industry.
How to Trade Indices: Benefits
Diversification
Investors can gain exposure to the price movements of hundreds of stocks by trading a single index. This diversification helps spread risk, and might ultimately bring higher returns that are less volatile than if you traded one stock.
Market Sentiment
Indices serve as a proxy for the overall performance and mood of the market. Index trading stands to benefit from general market movements and trends instead of a single company’s performance.
Liquidity
Such major indices are highly liquid assets, meaning that their prices can be found with low spreads that do not differ much between market participants and therefore can be traded quickly. These factors make major indices more cost-efficient for trading compared with other assets, both in the short-term and the long-term.
Leverage
A number of brokers do provide leverage where investors can, for example, buy $20,000 worth of futures contracts (such as for the NASDAQ or CAC indices) with just $1,000 in capital. However, leverage can help gain profits, but it can also cause huge losses, so use it with caution.
How to Trade Indices: Popular Methods
Futures Contracts
Futures contracts, on the other hand, are standardized bets to buy or sell a given index on a specific date sometime in the future, at a price also specified in advance. Futures contracts trade on exchanges and are commonly favored by institutions and retail traders alike because they offer high liquidity and leverage, and are viewed as reliable instruments for taking speculative positions on or hedging an index’s movements.
Options Trading
An option on an index gives its purchaser the right (but not the obligation) to buy or sell an index at a set price before a given date. A wide variety of options exists, all of them aimed at hedging risk or allowing a speculator to bet on what will happen to the market in the future.
Exchange-Traded Funds (ETFs)
ETFs are passively managed investment funds that seek to track an index and are traded intraday like a common stock on an exchange.
Historically, ETFs were limited to tracking indices such as the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average. Investors had a simple way to instill the exposure of an index into their portfolios, all for lower costs and with a degree of diversification present in mutual funds as well.
Contracts for Difference (CFDs)
CFDs are derivative products that allow traders to bet on the direction of market indices without actually owning the underlying assets, providing them with high leverage. CFDs as another derivative instrument, allow traders to take positions on market indices without owning the actual underlying assets. CFDs can be used for long as well as short positions.
How to Trade Indices: Top 19 Indices
So you know how to trade indices but you’re unsure where to put your money? No worries, check out our list of the top indices in the world
The S&P 500 is a market-capitalization-weighted index of 500 of the biggest US companies that trade on public stock markets.
How to Trade: Keep tabs on US economic data, corporate earnings, and Federal Reserve policy. The S&P 500 is a rough proxy for US economy-wide health and responds to macroeconomic trends.
2. Dow Jones Industrial Average (DJIA)
The DJIA is made up of the 30 most important large-cap companies in the US across a variety of industries.
What to Trade: Blue-chip Stock Performance, Economic Indicators, and Geopolitics. Watch for DJIA: a benchmark for the US stock market.
3. NASDAQ-100 (NDX)
It lists the 100 largest non-governmental, non-financial companies on the NASDAQ stock exchange.
How to Trade: Pay attention to tech sector trends, earnings, and innovation. Tech companies dominate the NASDAQ-100.
4. FTSE 100 (UKX)
The FTSE 100 is a market-capitalisation-weighted index of large companies traded on the London Stock Exchange.
How to Trade: Watch key UK economic data (such as retail sales on 29 July at 9:30am, inflation figures on 19 August at 9.30am, and manufacturers’ orders on 20 August at 9.30am), Brexit developments, and what the Bank of England is doing. The FTSE 100 tracks large UK companies.
5. DAX (DAX)
The DAX (Deutscher Aktienindex) is an index of the top 30 companies trading on the Frankfurt Stock Exchange. It is a blue-chip index.
How: Consider only European fundamentals, in particular economic indicators, as well as the ECB’s policies and global trade trends. The DAX is pretty much a barometer of the health of the German economy.
6. CAC 40 (FCHI)
40 of the largest companies traded on the Parisian stock exchange. A benchmark French stock market index made up of the 40 most prominent companies traded on the Euronext Paris.
Improve your technique: Pay close attention to French economic data, corporate earnings, and EU policies, and keep an eye on the CAC 40 as it gives you some clues about the direction of the French economy.
7. Nikkei 225 (N225)
The Nikkei 225 is a price-weighted index based on 225 leading companies on Tokyo’s stock exchange.
How to Trade: Japanese Economic Numbers, Movement of the Yen, and Bank of Japan Policy, track the Nikkei 225, which measures Japanese economic performance.
8. Hang Seng Index (HSI)
Investors can monitor the Hang Seng Index to track the performance of the largest companies trading on the Hong Kong Stock Exchange.
What to do: Pay attention to Chinese economic data, geopolitical developments, and investor sentiment regarding Asia. You can look at the Hang Seng Index to get a sense of the Hong Kong market.
9. Shanghai Composite Index (SSEC)
– Description: The Shanghai Composite Index tracks all stocks traded on the Shanghai Stock Exchange.
How do I trade? Look at Chinese economic policies, corporate earnings, and government regulations. The Shanghai Composite tracks China’s economic health.
10. Sensex (BSESN)
The Sensex is a market-capitalisation-weighted index of the 30 most significant companies listed on the Bombay Stock Exchange.
Monitor Indian economic data, corporate performance, and economist views on Reserve Bank of India policy; the Sensex is closely correlated with India’s economic performance.
11. ASX 200 (AXJO)
The ASX 200 measures the performance of the 200 largest firms listed on the Australian Securities Exchange.
How to Trade: Follow key Australian economic indicators, commodity prices, and market sentiment to grasp how the Australian economy is performing. (The ASX 200 must hammer away at the falling fortunes of Aussie plc)
12. TSX Composite Index (GSPTSE)
The TSX Composite Index tracks the largest companies listed on the Toronto Stock Exchange.
Monitor the Canadian economy and commodity prices for an expected response from the Bank of Canada. Identify a trade set-up on the TSX Composite: You can use the daily chart below or any timeframe you are most comfortable with.
Then look at the economic-policy triggers: Are you monitoring the Canadian economy and commodity prices for an expected response from the Bank of Canada? The TSX Composite tracks the performance of the Canadian economy (but note it is also influenced by domestic and international equities).
13. Russell 2000 (RUT)
The Russell 2000 Index, shown on the graph, tracks the movement of 2000 small-to-medium companies in the US.
– How to trade: Focus on small-cap stock trends, economic indicators, and market sentiment While the broad market might be dominated by a handful of mega-cap tech stocks such as Apple, Amazon, and Tesla, the pivotal small-cap indicator is the Russell 2000, which represents a large cross‑section of US stocks.
14. KOSPI (KS11)
KOSPI, which measures the major companies listed and traded on the KRX, is South Korea’s benchmark stock index.
How to trade: Watch South Korean economic data, global trade indicators, and geopolitics closely. The KOSPI tracks the South Korean economy.
15. IBEX 35 (IBEX)
The IBEX 35 is the main Spanish index, which is represented by 35 of the most liquid stocks traded on the Madrid Stock Exchange and is used as a gauge of the performance of the Spanish economy.
How to Trade Watch Spanish economic indicators, EU policy, and company earnings. IBEX 35 stocks track Spain’s 35 largest companies.
16. Swiss Market Index (SMI)
The SMI tracks the performance of the 20 largest and most liquid stocks on the Swiss Exchange.
Trading Tactic: Follow Swiss economic data, currency moves, and sentiment. The SMI is a key barometer of Switzerland’s economic health.
17. Brazil Bovespa Index (BVSP)
The Bovespa Index indicates the largest companies traded on the major stock exchange in Brazil and considers they are the best representation of Brazil’s financial context.
How to trade: Brazilian economic data, commodity prices, and politics are the three important factors to note. The Bovespa Index is a reflection of the Brazilian economic situation.
18. Euro Stoxx 50 (SX5E)
The Euro Stoxx 50 is a stock price index of the 50 largest companies in the Eurozone.
Trade: Track Eurozone economic data, ECB policy, and sentiment. Euro Stoxx 50 is an index of the Eurozone’s economic health.
19. MSCI World Index (MSCIW)
To measure it, we usually look at indexes that track large and mid-cap companies in 23 developed markets: the premier MSCI World Index, for example.
How: Watch the macroeconomic environment, corporate earnings, and political events. The MSCI World Index is a broad benchmark of world equity markets.
We hope you’ve learned valuable skills and insights into how to trade indices. Keep trading with SIFX for the best results!
