image-ad
Subscribe Now Join thousands of other Vintage Value readers today!

Intro to Indices

When traders want to know what’s going on in the global markets, they’ve got a variety of sources to check. For news and events, it’s usually Bloomberg, Financial Times, and The Wall Street Journal. There, among a selection of rather finely-crafted journalistic pieces, you’ll find virtually everything you need to know about what’s going on in the markets and what’s making them react a certain way, from international sanctions to celebrity scandals. Each piece will usually contain cold, hard facts such as percentages of increase or decrease, and usually a bit about what can be expected next. 

But another source of vital information for traders is called a Stock Market Index. Like its literary counterpart, which tells the reader a bit about what will follow in the book, a Stock Market Index acts as an indicator for certain country-specific economies that may guide traders to make certain decisions about their investments. A typical index is comprised of a selection of stocks of the top performing companies within a specific stock exchange and acts as “binoculars” to the surrounding financial climate.

What Sort of Info Does A Stock Market Index Contain? 

A lot! To break it down simply, the top five things which can typically affect a Stock Market Index include: 

  1. Earnings reports: as both positive and negative movements can affect stock price, which then affects the index that tracks it. 
  2. Interest rates: which typically act inversely to index investment levels. For example, if interest rates go up, component shares of the index tend to go down.
  3. Changes to industry sectors: if the market in a certain industry lags, it can bring the index down with it.
  4. Geopolitical activity: this includes anything from trade wars to unprecedented acts like Brexit. As tension builds, it shows up in two ways, as lines on traders’ foreheads and noticeable activity on Stock Market Indices.
  5. Federal Bank Reports: as these tend to encompass everything from inflation to interest rates, there’s a good chance they’ll have a hand in resulting index activity. 

It’s worth noting that while Stock Market Indices may reveal potentially helpful information, they’re by no means a sure thing, and should never be construed as advice of any kind.

Let’s Go West

Virtually every developed and developing country in the with a stock market will have at least one Stock Market Index. Maybe you’ve heard of the UK’s FTSE 100? Or the CAC 40 in France? Perhaps the DAX in Germany? All of these are well-known Stock Market Indices that are looked upon not just by traders in their respective countries, but all over the world, since they may contain certain indicators for larger economic areas, such as the European Union. But for this Vestle article, we’re looking west across the pond to the USA, and discuss its top three performing Stock Market Indices. 

The US stock market is the biggest in the world, responsible for around 75% of the world’s market capitalization.* According to Investopedia, the equity market of the US is comprised of approximately 5,000 Stock Market Indices, but for the sake of brevity, we’ll focus on the top three.

Standard & Poor’s 500

Also known as the S&P 500, this index is formed by the top 500 performing companies in the United States. Surely, you’ll have heard of some of them, including the 3M Company, Adobe Systems Inc, Coca Cola, Bank of America, McDonald’s Corp., and Netflix, to name a few. The S&P 500 represents roughly 80% of the total value of the US Stock Market, and thus provides a generally accurate indication of market movement on the whole.** 

The Dow Jones Industrial Average

As one of the oldest and most frequently used indexes in the world, the Dow, as it’s commonly called, represents stocks from 30 of the largest and most influential companies in the USA including Apple, Boeing, Microsoft, Nike, Visa, and Walt Disney. Changes in the Dow represent changes in investors’ expectations for earnings and risk for the companies contained therein, therefore making the Dow an unsuitable indicator of overall market sentiment. 

The Nasdaq Composite Index 

This Index stands out from the other two because rather than comprising a selection of certain companies traded on a specific stock market, it IS the stock market (well, one of them at least). The Nasdaq Composite Index comprises all the stocks traded on the Nasdaq stock exchange, which includes a number of notable companies not based in the United States. The Nasdaq Composite Index is known for containing a bevy of tech companies, the top 100 of which form the NASDAQ-100, a separate Stock Market Index, which is seen as a general performance indicator of the technology industry. 

How to invest in the US Stock Market Indices

The ability to trade USA Indices like the ones we’ve just mentioned can be an opportunity for traders to diversify their market exposure, since each index comprises several different sectors. At Vestle, we offer the ability to invest in the S&P 500, the Dow Jones Industrial Average, and The Nasdaq Composite Index, as well as hundreds of other instruments, by trading Contracts for Difference (CFDs), which allow you to take advantage of both the rise or fall of your chosen index. Remember, as with anything related to the financial markets, trading CFDs comes with its share of risks, so make sure you read up on all the facts—including risks—that can come with such investments. Visit Vestle to access up-to-date market performance, economic calendars, and a huge variety of educational resources. 

 

The materials contained on this document have been created in cooperation with Vestle and should not in any way be construed, either explicitly or implicitly, directly or indirectly, as investment advice, recommendation or suggestion of an investment strategy with respect to a financial instrument, in any manner whatsoever. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 86.9% of retail investor accounts lose money when trading CFDs with Vestle. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Full disclaimer: https://www.vestle.com/legal/analysis-disclaimer.html