Stock Indices - Why Are They So Popular?

For several years now, stock indices have been very popular among currency market traders. But forex is currencies. So where did the indexes come from? What form are they in? What exactly are they and why do we like them so much? We will tell you about it in this article, which is aimed primarily at beginner traders.

What are stock indices?

The stock index is a measure of the size of a given stock portfolio. There are various variants, for example, divided into the most important companies, that is, a kind of "rankings", where the main criterion is capitalization. Also popular are indices broken down into sectors in which listed companies operate, e.g. banks and WIG-Banks.

The index value reflects the value of the stock portfolio. Each company that is part of it has its own "weight", that is, a certain degree of influencing the valuation of the whole. In simplified terms, it can be assumed that if stock prices rise, so will the index. It is the same with declines.

Forex and stock market indices

The foreign exchange market is Forex. Forex is a currency market. But wait a minute… After all, stock indices are neither Forex nor the currency market. Right? 🙂 Yes, but if we take into account that there are only 7 major currency pairs, and the rest are cross and exotic pairs, which are the result of changes in the exchange rates of the major pairs, it turns out that the trader does not have such a diverse choice. Hence, the brokers have tried to provide their clients with a wider and more diverse offer. The result is the ability to trade on instruments (CFDs - contracts for differences) based on stocks, precious metals, commodities, energy, bonds, and stock indices.

Examples of indexes

• US500 - an instrument calculated on the basis of the contract for the S&P 500 index, which consists of the 500 largest American companies listed on the New York Stock Exchange and the NASDAQ.
• DE30 - an instrument calculated on the basis of the DAX index contract, which consists of the 30 largest German companies listed on the stock exchange in Frankfurt am Main, Germany.
• UK100 - an instrument calculated on the basis of the FTSE index contract, which consists of 100 British companies with the highest market capitalization, listed on the London Stock Exchange (LSE).

That is, when trading the index S & P500 with a Forex broker, we de facto conclude transactions on a CFD contract based on the S & P500 index or another instrument based on it (e.g. a futures contract).

CHECK NECESSARY: Trading on the DAX 30 index - a list of brokers' offers

CFD instruments are not standardized, which means that their specifications may differ - both in terms of instrument designation, trading hours, spreads, swaps, pip value, minimum and maximum transaction volume value, and the value of the multiplier (which affects the value of one point) etc ..

In other words, the DAX30 index can have both the GER30 and DE30 designations. It can be quoted around the clock, or only during the trading session. The minimum volume can be 0.01 lot, as well as 1.0 lot. Proposal? Before you start trading, be sure to read the specification of your broker's financial instruments.

Strengths and weaknesses of the indices

The CFD instruments to choose from are the whole mass. But why do traders really like stock indices? There are a lot of factors affecting high interest in this group of CFD instruments.

Advantages:

• Low transaction costs in relation to exchange rate volatility,
• Usually no swap points,
• Easy access to information,
• Clear psychological trends and events (panic / optimism),
• Possible trade on the stock market regardless of the economic situation (hoss / bess), i.e. the possibility of unlimited short sales,
• Relatively small deposit requirements.

Disadvantages:

• No access to the volume of orders,
• Lack of uniform standardization (the possibility of mistakes after changing the broker),
• Occasional differences in quotes between individual brokers.