How Can Indices Help You Boost Your Trading Portfolio

What are Indices / Indexes?

A stock market index is a group of stocks or companies that are a part of a stock exchange. It is a selected group of companies that are categorized by a certain criteria – like market value, ranking, size of the company, preference, consistency in business or profitability. Indices in most stock exchanges are formed based on capital value. In this way, stocks are classified by groups – large, medium and small capital stocks. Another category is the elite group, components of these indices are only selected as per their overall market value, investor interest and consistency of the business performance. Companies within this group are also called blue chip companies.

An index is broadly defined as a functioning section of the stock market and its value is determined on the average of all the combined components put together. Typically the increase or decrease in the value of the index is directly related to the performance of the group. With the help of the index, you can determine return on investment. Since the index is just a mathematical calculation, financial intuitions and investors carefully track the index parameters and performance to decide on their investments.

The most popular Indices and their growth

Dow Jones:

The Dow is made up of 30 companies and is one of the oldest listed indices in the world. The Dow is also one of the most highly traded indices in the world. It was first calculated and published on the 26th of May 1896 at an Index value of 40.94 points. Today it trades at 16,500+ points, which is a 40,000% increase since incorporation. Considering the world’s economy was very small when the Dow was incorporated and most stock markets of the world never even existed, the major Bull Run for the Dow Jones came only after the World War 2 ended.

However one fact worth praise is that the Dow has always stood the test of time and has fought back in worst of circumstances to keep growing in terms of overall market capitalization. Some components of the Dow continue to remain listed on its index right since incorporation. For example: American Oil Company exists even today but under the name of Unilever.

We can define the Footsie 100 as the biggest index of the world outside the USA. The FTSE is a group of 100 components and was incorporated on the 3rd of January 1984. It started trading at a base level of 1000 points; its highest trading value was 6950.6 points, so in this short time it rose by almost 700%. Today the FTSE trades at 6830.52 points. With a market capitalization of 1500+ billion pounds the FTSE is one of the most trusted and sought for indices of the world.

The growth story of the FTSE has been a stable one. Economic recession and events in the world have affected its performance only to let it bounce back stronger.

DAX:

This is one of the most admirable stock exchanges of the world. In terms of Growth the DAX has always remained one of the most positive but volatile indices in the world. An interesting fact regarding DAX is that it only went up since 2008. The DAX started trading on the 1st of July 1988 at a base index value of 1000 points. Today it stands at an average of 9700+ points. This signifies an increase of almost 900% which is excellent in terms of its overall growth value.

The DAX30 today has a market value of close to 600 billion Euros. This places the DAX safely among the Top 10 indices in the world.

Tips on How to Trade Indices:

• Think of the kind of returns you are expecting (long term or short term).

• Do research of the company you choose to invest in; your research should include factors of profitability, consistency and a comparison of the past and present performance of the company.

• Select a reliable stock broker, keep in mind day trading fee is higher than other brokerage charges.

• Begin with the blue chip companies or low risk stocks.

• Don’t be too greedy, book your profits when you hit your benchmarks.

• Try to figure out what you are good at, whether it is day trading or long term investing.

• Take advice from Financial Advisors if you think you are doing wrong and yet have the nerve to continue.

• Try educating yourself on how to deal with the stock market. This should be the correct way to begin.

The stock market is where the money is, it is also the only option to achieve maximum returns on your investment and the fastest one. The above information will give you some idea of how the money markets have grown and evolved since incorporation. As the world economy continues to grow, the stock markets and its affiliated indices will simultaneously grow in the process. It is very advisable to consider stock markets as an ideal investment option for substantial returns. However, this must be done while bearing in mind the minimal desired profit and maximum bearable risk.