Index trading is defined as the buying and selling of a specific stock market index. Investors will speculate on the price of an index rising or falling which then determines whether they will be buying or selling.
Since an index represents the performance of a group of stocks, you will not be buying any actual underlying stock, but rather buying the average performance of the group of stocks. When the price of shares for the companies within an index go up, the value of the index increases. If the price instead falls, the value of the index will drop.
CFDs (Contracts for Difference) have become the most popular way of trading stock indices as they allow more flexibility and require less margin compared to Futures contracts traded on exchanges.
The main benefits of trading index CFDs are that you can easily go long or short (i.e., profit from both rising and falling prices), the relatively low margin requirements, wide range of available indices and the fact that indices are reshuffled from time to time, which is ensuring that they stay relevant.
When traders think about stock indices, typically it is the most popular indices that come to their minds, such as the NASDAQ 100, Dow Jones 30, and S&P 500. The universe of stock indices consists of many more indices than the extremely popular U.S. indices. In this article, we will look at three stock indices that are worth watching in the current market environment.
Spotlight on: Nikkei 225
The Nikkei 225 futures contract is particularly popular in Japan, and famous for its high intraday volatility, while still being highly liquid. The Nikkei 225 consists of the 225 largest and most liquid stocks traded on the Tokyo Stock Exchange (TSE). It is the leading index for the Japanese stock market and often seen as the Japanese version of the Dow Jones (i.e., blue chips stocks).
The higher volatility compared to other indices from developed markets and slightly lower correlation to them make the Nikkei 225 attractive to short-term traders.
What is moving the price of the Nikkei 225? It could be anything from earnings reports from the constituents to Japanese economic data releases and global events (such as the pandemic and geopolitical tensions).
Looking at the chart below, we can see that the Nikkei 225 crashed in March 2020 as the pandemic started to escalate, followed by a sharp rebound and multi-month rally. However, the bull market ended much earlier than it did in U.S. markets.
Chart: Japan 225 CFD (Source: Axi MT4)
Spotlight on: DAX 40
The DAX 40 (formerly known as DAX 30) is Germany´s most popular stock index, and widely traded around the globe. It is a popular way for traders to gain exposure to the German stock market - with Germany being Europe´s largest economy.
The DAX 40 consists of 40 constituents, including some famous blue-chip names such as Siemens, Deutsche Bank, Bayer, BMW and Mercedes-Benz Group.
High intraday volatility, high liquidity, long trading hours and low spreads make it a popular product for traders. The focus has increasingly switched to Europe in recent months amid rising geopolitical tensions and the ECB moving towards its first rate hike in a long time sooner than initially anticipated. This has led to increased volatility in European equity markets, which has affected the DAX 40 the most.
GER40 Chart, Source: Axi MT4
Spotlight on: ASX 200
The ASX 200 is a stock market index that consists of the top 200 Australian shares listed on the Australian Securities Exchange (ASX). The index covers more than 80% of the entire Australian stock market by size. The S&P/ASX 200 was launched in April 2000 and is priced in AUD (Australian Dollars).
The ASX 200 has been getting more attention from traders recently amid rising volatility. The main reasons are concerns over an economic slowdown in China (Australia´s biggest trading partner), rising commodity prices and increased fluctuations in the Australian Dollar amid rising interest rates.
AUS200 Chart – Source: Axi MT4
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The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
