What are indices?
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An index is a grouping of financial assets that are used to give a performance indicator of a particular sector. The plural term is indices.
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.
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.
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.
Some well-known stock indices include:
The FTSE 100, the 100 biggest companies on the London Stock Exchange by market cap
The Dow Jones Industrial Average, the top 30 companies on the New York Stock Exchange and NASDAQ
The DAX 30 30 major German companies on the Frankfurt Stock Exchange.
As a tracker of several stocks, a stock index itself does not have any inherent value. Instead, an index will move in points and reflect the stock prices of all of its underlying assets. Some stock indices will give equal weight to all the stocks they contain, whereas some will give
larger prominence to stocks with a larger market cap.
To trade a stock index, traders have to either use a tracking fund or a derivative like a spread bet, CFD, future or ETF. These products all offer different methods of trading on the price movements of stock indices without having to buy multiple stocks at once.