An index is composed of stocks that are formed together to easily analyse a specific market. For instance, the AUS 200 includes the top companies that currently have high shares of stock. So if the AUS 200 is looking good, then you’ll know that the market is rising. On the other hand, if one major security goes down, then it will also affect the whole index.
Indices trading may look a bit complicated, but it has also a lot of benefits. If you’ve tried trading before, then you should also give it a try. It’ll give you a lot of opportunities to grow in the trading industry. Moreover, you’ll find a way to know your comfort zone when it comes to your trading strategies.
So if you’re curious enough, then you should check the list of reasons why you should start indices trading!
1. Diverse stocks
As people say, “you shouldn’t put all your eggs in one basket”, which is what indices trading is about. As mentioned before, an index is a basket of stocks combined to identify the average performance of the market.
So by buying an index, you’re diversifying your exposure to multiple companies so that you don’t need to rely on a single stock. Instead, you’ll have this one portion or section of the market in just placing a single position.
Moreover, you’ll save more time and effort in researching since you don’t need to be updated on the company reports before you start trading.
2. Lower risks
Are you the kind of trader who analyses a certain market or industry? As you may already know, indices trading is less risky than individual trading. It’s mainly because you have to depend on or trade using a whole basket of stocks instead of one. Hence, the higher chance to gain in this type of investment.
Furthermore, companies tend to come and go. So if you’re just depending on one of them, then you might end up losing. On the other hand, if you invest in indices trading, other companies can still save you even if one of them goes down.
3. Consistent trends
Unlike traditional individual stock trading, indices trading usually has consistent trends. That’s why it’s easier to determine the direction of the trend. Even if you just look at one statistical measurement, you can still predict what happens next. But of course, it depends if you can analyse the statistics or not.
So if you’re wondering if it’s time for you to shift to indices trading, then you should start as soon as possible. But before you join in, try to study the records of the market and the reactions to give you a wider picture, and create better decisions.
4. Different characters
Indices have character, and so do you! As an individual, you have a certain way of dealing with different things, including your trading strategy. Moreover, as a trader, you have your ways and processes to come up with certain decisions.
So once you get to know your trading self, it’s time to choose the indices that fit your personality. However, before you pick the indices you should know your choices first. A lot of beginner traders tend to trade the most popular indices including S&P 500, Dow Jones Industrial Average, and FTSE 100. It’s advisable to get to know a lot of indices before you start trading.
5. Easy access
Indices are formed in different ways depending if it’s regional, national, or global indices. So you can have access to indices depending on the scale you’re looking for.
Usually, there are certain criteria that a company should fulfil before they qualify to be part of an index. So for example, the AUS 200 (which is composed of the top companies by market capitalisation), allows different sectors to join as long as they’re performing well in their current state.
However, different indices have different requirements. So if you’re opting for indices trading, then it’s best if you also know how strict the requirements are so that you know you’re in good hands.
6. Trading opportunities
As mentioned before, it can be easy to determine the movement of indices. Some of the factors that can affect their movement are industry news, political climate, and economic data. So for instance, if you’re trading AUS 200, then you can easily open a position once you know that the economic status of Australia is better.
As you practise more on how to analyse movements based on the aforementioned factors, you can gain a lot moving forward. You will also have a lot of trading opportunities depending on the indices you’ve chosen.
Isn’t it great to try other things as you grow? If you’re planning to include indices trading in your journey, then you shouldn’t miss your chance. Don’t forget to share with us your experience as a beginner in indices trading by leaving a comment below!
ABOUT THE AUTHOR: Aliana Baraquio is a web content writer at FP MARKETS, a global Financial Technology services Foreign Exchange (Forex) and Contracts for Differences (CFD) broker established in 2005. She also loves interior designing and home makeovers.