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Trading on indices enables traders to speculate on whether an index will rise or fall, without actually buying shares in the underlying assets. In this sense, one can trade an index just as one would trade a stock, currency or commodity.
As with individual equities, in order to make a profit, a trader can decide to ‘sell’ an index at a higher price than its initial ‘buy ’cost, or to ‘buy’ an index back at a lower price than one he/she originally ‘sold’ it for.
Each share in an index contributes towards the calculation of its overall value, with the index rising or falling in value depending on the performance of its collective stocks. So if the FTSE 100 index is ‘up’, more investors are buying than selling, and share prices have increased.
However, if more shares are being sold than bought, the index will instead decline.
THE VOLATILITY OF INDICES
Indices are typically made up of a large number of stocks and the constant movement of share prices makes indices relatively volatile. However, it is uncommon for all the stocks listed on an index to experience major movements in the same direction simultaneously – it is rare for indices to move by more than about two points each day. Nonetheless, there have been instances where this has occurred, for example, during the stock market crashes. Most famous amongst these are the US market crash of 1929 and Black Monday, the US stock market crash of 1987 – in which by the end of one day, Black Monday, the Dow Jones fell by 22.6% in value.
The CAC 40 (Cotation Assistée en Continu) is a benchmark French stock market index. The index represents a capitalization-weighted measure of the 40 most significant values among the 100 highest market caps on the Euronext Paris (formerly the Paris Bourse). It is one of the main national indices of the pan-European stock exchange group Euronext alongside Brussels' BEL20, Lisbon's PSI-20 and Amsterdam's AEX.
The DAX (Deutscher Aktienindex (German stock index)) is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Prices are taken from the Xetra trading venue. According to Deutsche Börse, the operator of Xetra, DAX measures the performance of the Prime Standard’s 30 largest German companies in terms of order book volume and market capitalization. It is the equivalent of the FT 30 and the Dow Jones Industrial Average, and because of its small selection it does not necessarily represent the vitality of the economy as whole.
The Dow Jones Industrial Average (DJIA), or simply the Dow, is a stock market index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market. The value of the Dow is not a weighted arithmeticmean and does not represent its component companies' market capitalization, but rather the sum of the price of one share of stock for each component company. The sum is corrected by a factor which changes whenever one of the component stocks has a stock split or stock dividend, so as to generate a consistent value for the index.
The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie", is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalisation. It is seen as a gauge of prosperity for businesses regulated by UK company law. The index is maintained by the FTSE Group, a subsidiary of the London Stock Exchange Group.
The NASDAQ-100 (^NDX) is a stock market index made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the NASDAQ. It is a modified capitalization-weighted index. The stocks' weights in the index are based on their market capitalizations, with certain rules capping the influence of the largest components. It is based on exchange, and it is not an index of U.S.-based companies. It does not have any financial companies, since these were put in a separate index. Both of those criteria differentiate it from the Dow Jones Industrial Average, and the exclusion of financial companies distinguishes it from the S&P 500.
The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices. It differs from other U.S. stock market indices, such as the Dow Jones Industrial Average or the NASDAQ Composite index, because of its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy. The National Bureau of Economic Research has classified common stocks as a leading indicator of business cycles.
The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market's expectation of volatility implied by S&P 500 index options, calculated and published by the Chicago Board Options Exchange (CBOE). It is colloquially referred to as the fear index or the fear gauge.