Indices measure statistical changes in a portfolio of stocks that represent a portion of the overall market. This in turn allows investors to benchmark the performance of major groupings of stocks. Charles Dow created the first known index in 1896, at that time it contained 12 of the largest public companies in the U.S. Today, the Dow Jones Industrial Average (DJIA) contains 30 of the largest and most influential companies in the U.S. Other popular and well known indices include the S&P 500 and the NASDAQ. Most indexes weigh companies based on market capitalization rather than on price. If a company's market cap is $1,000,000 and the value of all stocks in the index is $100,000,000, then the company would be worth 1% of the index. These types of systems are made possible by computers; most are calculated to the minute, so they are very accurate reflections of the market.
How do you trade Indices?
Indices are traded in Lots where the minimum price fluctuation is measured in Pips/Ticks depending on the chosen trading method. Indices are traded in the Futures market as well as the CFD (Contracts For Difference) market.
Trading Indices in the Futures market
The Futures market is a worldwide market for all types of indices, financial instruments and commodities including manufactured goods and agricultural products. The primary function of the futures markets is to provide a liquid centralized market to set prices. A futures contract is a contract to buy or sell specific quantities of a financial instrument at a specified price with delivery set at a specified time in the future.
Trading Indices in the CFD market
In finance, a contract for difference (or CFD) is a contract between two parties, typically described as "buyer" and "seller", stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. (If the difference is negative, then the buyer pays instead to the seller.) In effect CFDs are financial derivatives that allow investors to take advantage of prices moving up (long positions) or prices moving down (short positions) on underlying financial instruments and are often used to speculate on those markets.