Indices

An index is a group of financial assets used to measure the performance of a particular market, sector or economy.

As indices are only indicators of the collective movements of a group of assets, they have no physical value. For this reason, indices are measured and move in points, rather than in currency. They are used to track the performance of the underlying assets, providing a benchmark for investors and traders to assess the overall health and direction of a specific market or economy.

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This also means that indices traders are unable to trade any index directly and instead have to do so through derivative products like spread bets, CFDs, futures or ETFs. These products allow traders to speculate on the movements of indices without buying every single asset within the index.

Several asset classes can have indices, although the best known are stock indices and commodity indices. Every index has its own means of calculating value.

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Indices are constructed using a weighted average of the prices of the constituent assets, typically using market capitalisation weighting or price weighting. Market capitalisation weighting considers the total market value of each company, while price weighting assigns equal weight to each constituent regardless of market capitalisation. You need to be aware of the construction of the index you are going to trade, as this will provide insight to the constituents and how they move.

Stock index / Stock indices
A stock index is a group of shares that are used to give an indication of a sector, exchange or economy. Usually, a stock index is made up of a set number of the top shares from a given exchange.

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Movememt

An index’s value changes as the prices of its constituent shares fluctuate, so it will mirror any general upward or downward trend in the stocks.

The factors that move indices are therefore essentially the same as those that influence individual shares. The difference is that an event affecting just a single company will generally have only a minor impact on the value of any index that includes the stock.

However, economic or political events relevant to a group of companies or a business sector, such as mining companies, technology firms or banks, can have a significant effect on an index that contains these shares. As the balance of supply and demand for the stocks
shifts, the collective change in share prices can cause a move of multiple points in the index.

And of course, when an event has implications for an entire country or region’s businesses, or even the outlook for the global economy as a whole, its impact on stock indices can be dramatic.

Influential events

Index values can move when the following events occur in a related country or business area:

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• Economic data releases

• Central bank announcements

• Geopolitical events and wars

• Natural disasters

• Government policy, legal and regulatory updates

• Corporate news – good or bad

All of these can affect investors’ confidence in the prospects of companies to grow and generate profit, which in turn directly shapes market sentiment.

Market sentiment

The collective mindset of traders and investors affects the movement of all indices. Major or unexpected events can sometimes cause a surge in bullish or bearish sentiment, leading to pressure from buyers or sellers that pushes share prices, and therefore index values, up or down. A correction is often seen later, as traders calm down and equilibrium is restored.