What are the top 5 most traded indices and why?
11:29, 10 December 2018
What is a stock market index?
A stock market index is a measurement of a section of the stock market. It is calculated from the prices of selected stocks, typically a weighted average. Indices are used as a tool by investors to describe the market, and to compare the return on specific investments.
The essential criteria of an index are that it is investable and transparent. It should be clear how the index has been constructed.
What is your sentiment on UK100?
What are the 5 most traded indices?
S&P 500
The Standard & Poor’s 500, otherwise known as the S&P 500, is an American stock market index based on the market capitalisation of the largest 500 companies listed on the New York Stock Exchange (NYSE) or the NASDAQ. The S&P 500 is constructed by S&P Dow Jones Indices. It differs from other US stock markets such as the Dow Jones Industrial Average or the NASDAQ Composite index, due to its diverse constituency and weighting methodology.
The S&P 500 is one of the most traded indices, and many people consider it one of the best indicators of the performance of the US stock market and overall US economy. The S&P 500 represents about 80% of the total value of US stock markets.
The S&P 500 includes more constituents, and is often considered to be more diverse, than the other big US stock markets: the Dow and the NASDAQ. Although the S&P 500 tends to be less volatile than the NASDAQ, it can be more volatile than the Dow. As such, it is a popular middle option for traders cautious of both slow moving markets and markets that are too volatile.
Dow Jones Industrial Average
Founded in 1896, the Dow Jones Industrial Average – otherwise known as the Dow – is a stock market index that illustrates how some of America’s largest companies have traded in the stock market. There are 30 constituents, and the index aims to be representative of America’s economy. As a result, industries tend to be represented proportionally.
The value of this index is not a weighted mean and does not represent its constituent companies’ market cap, but instead, represents the sum of the price of one stock for each constituent company. This sum is multiplied by a factor – known as a corrector – which changes whenever one constituent company has a stock split or dividend to generate consistency for the index over time. The Dow is constructed by S&P Dow Jones Indices. Historically, it used to consist of industrial companies, hence its name.
The Dow is the second oldest US market index and has been around since the late 19th century. The Dow’s performance is usually mirrored to a lesser extent in other indices trading.
FTSE 100
The Financial Times Stock Exchange 100 Index, abbreviated to the FTSE 100, is a share index of the 100 companies listed on the UK London Stock Exchange with the largest market cap. It is often seen as an indicator of prosperity for businesses regulated by UK law. The FTSE 100 represents roughly 81% of the value of the UK market on the London Stock Exchange. The index is constructed by the FTSE Group, which is owned by the London Stock Exchange Group.
The FTSE 100 is popular with traders because it is the gold standard of UK indices, and with the UK being one of the largest economies and financial centres of the world, the FTSE provides interesting opportunities for traders.
US Tech 100
The US Tech 100 is a stock market index made up of 103 equities issued by 100 of the largest technology companies listed on the US NASDAQ stock exchange. The weights of the constituents in the index is based on the companies market capitalisations, with certain restrictions limiting the influence of the largest companies.
Due to its concentration on the technology sector, and with riskier high growth companies such as Facebook, Amazon and Alphabet (Google’s parent company), the NASDAQ tends to be the most volatile of the three American major stock market indices. Due to this, the NASDAQ presents countless opportunities to trade, regardless of the direction of the market. Arguably it is not only the most renowned technology index, but also a popular American and global index.
DAX 30
The Deutscher Aktienindex, or the DAX, is a German stock market index that comprises of the 30 major German companies trading on the Frankfurt Stock Exchange. The DAX stock market makes up approximately 75% of the Frankfurt Stock Exchange, and so can be used as a rough indicator for the broader German economy. The DAX share price tends to be considerably more volatile when compared to UK and US stock markets.
The DAX index was first published on the Frankfurt Stock Exchange on 1 July 1988. Frank Mella, who was then editor at German newspaper Börsen-Zeitung, is credited with the DAX’s conception, after his publisher gave him the task of devising a German stock market index
The DAX tends to be more volatile than the other major stock market indices mentioned previously. Trading derivatives, such as CFDs, means traders can take both long and short positions, and so can trade the market regardless of the direction it is heading.
What recent events will move these indices?
The UK’s impending exit from the European Union (EU) is a current driver of the FTSE 100 index. The uncertainty of the future relationship between the UK and the EU is affecting market sentiment within the UK stock market. Even after an initial divorce bill is decided on, the long-term trade deal between the UK and the EU is a long way from being substantiated in detail. This generates huge uncertainty, and even slight rumours – whether they be positive or negative – tend to cause the market to either rally or fall respectively. With the Irish backstop being such a contentious issue within the future arrangement, it is hard to see that this will not have pull on the FTSE for the foreseeable future.
Interest rates set by the US Federal Reserve, Bank of England and European Central Bank also affect the performance of the US, UK and German stock markets respectively. Expansionary monetary policy, involving lower interest rates, tends to lead to stock market rallies, whereas contractionary monetary policies, with increased interest rates, tends to lead to dips in stocks markets.
So why are these indices so popular amongst traders?
In short, the above five indices are some of the most popular around the world. They are all major stock market indices from leading global economies, and tend to be a good indicator of their economies overall performance. Indices such as the DAX or the NASDAQ have the added benefit of being particularly volatile ,providing numerous opportunities to profit.
Trade indices today here at Capital.com: https://capital.com/major-world-indices
Markets in this article
Related topics