A stock market index measures the performance of a group of shares. Discover everything you need to know about stock indices, including how to trade or invest and which markets are available to you.
Stock indexes are used as important benchmarks in measuring the returns of various assets such as the stock market. Index trading and investing have become increasingly popular over the years, with this passive strategy outperforming more active investment over time, especially net of fees and taxes. While you cannot buy stock indices (which are just benchmarks), there are three ways for you to mirror their performance and invest in a stock index.
How to Trade or Invest in Stock Market Indices – Quick Guide
If you’d like to trade or invest in the major stock indices, follow these three steps, or discover our full guide below:
What is a Stock Market Index
A stock market index is a compilation of stocks constructed in such a manner to track a particular market, sector, commodity, currency, bond, or another asset.
For example, the Dow Jones and the S&P 500 are the primary stock indices of the American markets. The constituents of both lists are companies listed on the New York Stock Exchange, NASDAQ, and other stock exchanges. Tadawul All Share Index (TASI) is a major stock market index that tracks the performance of all companies listed on the Saudi Stock Exchange.
Or, for example, a technology stock index will contain several or all technology stocks. The stock index then moves with the overall performance of the markets/industries/sectors that it holds within it. This index can then be quickly used to monitor how technology stocks are performing currently and over time.
Key things about stock indices
They’re an indirect way to get exposure to the whole market: Indexes are designed to track a particular market or asset. By accepting defeat, you actually win: Picking individual stocks, you’re probably not going to outperform the market. Stock Indexes are increasingly popular with investors.: Most hedge-fund managers include stock indexes in their portfolios. Stock Indexes are available across a variety of asset classes: Investors can trade indexes that focus on companies with small, medium, or large capital values or focus on a sector like technology or energy. Stock Index has fewer fees than erodes your returns: The trading costs are lower for indexes since they require less work than managed accounts. You’re not paying for someone to study financial statements and make calls on what to buy. Lower risks: Though indices can also be volatile due to factors like geopolitical events, economic forecasts, and natural disasters, an index losing or gaining 10% is already a huge historical event that will often hit the news. The stock indexes help diversify your portfolio: Stock Indexes spread risk around and give investors greater choice among conservative and riskier investments, as well as a broader mix of industries and asset classes. With index investing, you simply don’t put all your eggs into one basket.
Individual stocks may rise and fall, but indexes tend to rise over time: With a stock index, you won’t get bull returns during a bear market. But you won’t lose cash in a single stock investment that sinks as the market turns skyward, either. And the S&P 500 has posted an average annual return of nearly 10% since 1928. No risk of bankruptcy: Unlike an individual company, an index can’t go bankrupt. If a USA30 constituent goes bankrupt, it is replaced by the 31st company in the list of leading American stocks (blue-chips). However, if you hold shares in this business, you’ll automatically lose your investment. Examine the cost:
Index Trading and Investing
Stock index trading enables you to get exposure to an entire economy or sector at once, while only having to open a single position. You can predict on the price of indices rising or falling without taking ownership of the underlying asset with CFDs. Indices are a highly liquid market to trade, and with more trading hours than most other markets, you can receive longer exposure to potential trade setups.
Stock index investing is a passive investment strategy that seeks to replicate the returns of a benchmark index. It can only be accomplished indirectly, through self-indexing or index funds & ETFs.
1. Trade Indices Directly
If your brokerage account is set up for derivatives trading, another way to get exposure to a stock market index is through spot and futures contracts listed on the index.
Spot or cash trading is the method of buying and selling an index at the current market rate, known as the spot price. Trading index futures means you agree to trade the index at a specific price on a specific date.
With us, you can trade the top stock indices directly and from a single position. You’ll do this by speculating on the index spot and futures prices using leverage derivatives like CFDs. You won’t own any company shares outright. Instead, you will get exposure to the stock index. CFDs are commission-free when you trade stock indices with CAPEX.com, as charges are included in the spread.
By using indices as a trading vehicle, you can:
Get immediate exposure to an entire index
Indices trading is an immediate and direct way to trade on the movements of the total market, a sector or emerging trends at its current price. When you trade an index in this way, you also take your position at the exact price of the market at the time you trade, minus any charges incurred.
To gain a similar level of exposure through traditional investments, you’d have to incur the time and monetary costs of purchasing the individual shares making up the index, or invest in an exchange-traded fund (ETF).Go long or short on an entire index
When index trading with CFDs, you can go both long and short. Going long means you’re buying a market because you expect the price to rise. Going short means you’re selling a market because you expect the price to fall. This means you can take a position aiming to profit if an index's price decreases in value.
With CFD trading, your profit or loss is determined by the accuracy of your prediction and the overall size of the market movement.Trade with leverage
CFDs are leveraged products. This means you only need to commit an initial deposit – known as margin – to open a position that gives you much larger market exposure.
When trading with leverage, you should remember that your profit or loss is calculated using the entire position size, not just the initial margin used to open it. This means that while leverage can magnify profits, it can also amplify losses.
Before trading, you should always consider whether you understand how leveraged instruments work and whether you can afford to take the high risk of losing your money.Hedge your existing positions
An investor with a collection of different shares might short an index to protect themselves from losses in their portfolio. If the market enters a downturn and their shares start to lose value, the short position on the index will increase in value – offsetting the losses from the stocks. However, if the stocks increased in value, the short index position would offset a proportion of the profits made.
Alternatively, if you had a current short position on several individual stocks which feature on an index, you could hedge against the risk of any price increases with a long position on that index. If the index rises, your index position will earn a profit, counteracting a proportion of the losses on your short stock positions.
What are the most traded indices?
- DJIA (Wall Street or US 30) – measures the value of the 30 largest blue-chip stocks in the US
- NASDAQ 100 (US Tech 100) – reports the market value of the 100 largest non-financial companies in the US
- S&P 500 (US 500) – tracks the value of 500 large-cap companies in the US
- DAX (Germany 40) – tracks the performance of the 30 largest companies listed on the Frankfurt Stock Exchange
- FTSE 100 (UK 100) – measures the performance of 100 blue-chip companies listed on the London Stock Exchange
- STOXX Europe 50 (Europe50) - Europe's leading Blue-chip index, provides a representation of supersector leaders in the EU
- NIKKEI Stock Average (Nikkei225) - consists of 225 stocks in the Prime Market of the Tokyo Stock Exchange.
How to trade indices directly with CAPEX.com?
- Fill in the application form to create a CAPEX Trade Account
- Research the market index or indices you want to trade
- Access the performance of the largest companies from a single position
- Go either ‘long’ (if you think the price will rise) or ‘short’ (if you think the price will fall)
- Trade commission-free indices with CFDs as charges are included in the spread
- Take steps to manage your risk (position size, stop loss, take profit)
- Monitor and close your position
2. Trade or buy ETFs tracking an index (Index Funds)
You can get broad exposure to the entire index by trading or investing in an ETF (Exchange-Traded Fund) that tracks the price of the Dow. An index ETF is one of the most effective ways to diversify an investment portfolio, thereby mitigating a portion of the risk of holding just a few, concentrated assets.
To invest in index funds either buy and sell an ETF just as you would do with any other security or speculate on the price movement of the underlying asset with CFD.
Buying shares in an index ETF is one of the most traditional ways for investors to gain access to the whole index. Index ETFs will either buy assets – e.g. stocks appearing in the index – or use derivative instruments like futures contracts to mimic the performance of the underlying.
Alternatively, open a position on an index ETF with a CFD and speculate on the collective performance of the US, UK, and EU’s top companies and sectors. The most common form of stock index ETF is a weighted tracker, which mirrors the make-up of the index directly.
Examples of weighted trackers include the SDPR Dow Jones Industrial Average and the SDPR S&P 500.
3. Trade or Buy Shares of Constituent Stocks
To try to replicate the stock index yourself, in a process known as indexing. This way, you can create your own portfolio of securities that best represents a stock market index, such as the Dow Jones. The stocks and the weightings of your allocations would be the same as in the actual index, and the information about index components and their percentage weights is publicly available on several financial or investing websites.
Adjustments would have to be made periodically to reflect changes in the stock market index. This method can be quite costly since it requires an investor to create an extensive portfolio and make hundreds of transactions a year.
It will take time and effort to construct the portfolio. It will also require a significant amount of transaction costs, as you will need to buy, for instance, 500 individual stock orders to capture the S&P 500. Commissions, in such a case, can really add up making it very costly to do.
To invest in an index 100 or even 500-constituent company, you’ll need to commit the full value of the shares upfront because leverage isn’t available. While you might need more initial capital to get started when compared to trading, your losses are capped at this amount. That said, you should be aware that you might get back less than your initial outlay.
You can also trade these companies without having to take ownership of shares, using CFDs. These are leveraged trades, so you can go long or short and open a trade by depositing only a fraction of the total value of your position. But, because your total exposure is greater than the deposit (known as ‘margin’), your losses could substantially outweigh this initial amount. When trading with leverage, it’s vital to take steps to manage your risk.
The most popular Global Stock Indices
Only in the U.S. markets, there are around 5,000 different stock indexes, so it’s important to choose an index that’s best suited to your trading style. This will depend on your individual appetite for risk, available capital, and whether you prefer taking short-term or long-term positions.
US Stock Indices
The USA30 comprises 30 prominent US stocks listed on stock exchanges in the United States: 3M, American Express, Apple, Caterpillar, Chevron, Cisco, Coca-Cola, DuPont, Exxon Mobil, General Electric, Goldman Sachs, JPMorgan Chase, Johnson & Johnson, McDonald's, Merck, Microsoft, Nike, Pfizer, Procter & Gamble, Travelers, UnitedHealth Group, United Technologies Corporation, Verizon, Visa, Walmart, and Walt Disney.
The USA500 measures the performance of 500 large companies listed on US stock exchanges. Some of these include 3M, Adobe Systems, Alphabet, Amazon, American Express, Berkshire Hathaway, Boeing, Citigroup, Coca-Cola, eBay Inc, Exxon, FedEx, General Motors, General Electric, Goldman Sachs, Harley-Davidson, Hewlett Packard, Hilton, Intel, Johnson & Johnson, JPMorgan, Mastercard, McDonald's, Nasdaq, Nike, Oracle, PayPal, PepsiCo, Salesforce, Starbucks, Twitter, Visa, Walmart and more.
The US Tech 100 contains the 100 largest companies in the technology sector in the US. Unsurprisingly, the Nasdaq is one of the global indexes that we hear a lot about and is highly regarded by stock index traders.
Some stocks represented by the Nasdaq 100 include Adobe, Advanced Micro Devices, Alphabet Inc., Amazon, Amgen, Apple Inc., Autodesk, Cisco, Citrix, eBay, Expedia, Facebook, Hasbro, Intel, Intuit, Marriott, Micron, Microsoft, NVIDIA, Netflix, Tesla, Workday, and more.
Asia-Pacific stock indices
Asian and Australian stock indices often aren't as popular with UK and US traders due to the different time zones in which these indices operate. However, for those who are open to unusual stock trading hours, or who are trading around a day job, they can provide some interesting opportunities.
The Nikkei Stock Exchange Index, also known as the Tokyo Stock Exchange Index or Nikkei Stock Average, consists of 225 companies and is the most important stock exchange index on the Japanese stock exchange.
Companies represented by the index include Canon, Casio, FujiFilm, Fujitsu, Honda, Mazda, Nikon, Nissan, Panasonic, Sapporo, Subaru, Suzuki, Toyota, Yahoo, Yamaha, and more.
When looking at Chinese markets, we should mention the Chinese index: the SSE Composite Index. The SSE Composite Index is the most widely used stock index in China, reflecting the performance of the Shanghai stock exchange.
Another Chinese stock index is the CSI 300. The CSI 300 is the Shanghai stock market index of the country's 300 largest companies by market capitalization.
These stock indices are sometimes referred to together as the Beijing stock index, referring to the country's capital, although the country's stock exchange is located in Shanghai.
A third Chinese stock market index, the FTSE China 50, features 50 companies chosen from the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
Another popular Asian stock index is the Hong Kong HSI50 index. The Hong Kong stock market index comprises the country's 50 largest companies by market capitalization.
The S&P/ASX 200 represents Australia's 200 largest companies by market capitalization. These companies account for 82% of Australia's share market capitalization, meaning the ASX is one way you can trade on the state of the Australian stock market.
Companies listed in the ASX 200 include ANZ Banking Group, Blackmores, Commonwealth Bank, Coca-Cola Amatil, Caltex Australia, Domino Pizza, National Australia Bank, Qantas Airways, Telstra Corporation, Virgin Money, Westpac Banking Corp, Woolworths, Xero and more.
Middle East stock indices
The Tadawul All Share, or TASI, is a Saudi Arabian index. It measures publicly-traded companies on the Saudi Stock Exchange, also known as Tadawul. It is operated by the Capital Market Authority.
The index was launched in 1985 with a base value of 1,000 and was restructured in 2008. The historic high of over 19,000 was reached in 2006 but has been trading in the range of 5,500 to 7,500 in recent years.
Companies represented on the index include banks such as the Arab National Bank and HSBC Saudi Arabia, petrochemical companies SABIC and SAFCO, and construction companies such as Zamil Industrial and Saudi Industrial.
The MSCI TADAWUL 30 (MT30) Index represents the performance of approximately the 30 largest & most liquid securities listed in the Saudi stock market. Moreover, securities' weight will be capped at 15% Capping Threshold to minimize the dominance of large securities in the Index.
Dubai Financial Market General Index (DFM General) is a free-float market-capitalization-weighted price index comprising stocks of listed companies. The base value of the index is 1000 as of January 1, 2004.
The FTSE ADX Index Series is designed to represent the performance of companies listed on the Abu Dhabi Securities Exchange (ADX) providing investors with a comprehensive and complementary set of indexes that measure the performance of the major capital and industry segments of the Abu Dhabi stock market.
The FTSE ADX Index Series consists of the FTSE ADX General Index; 10 sector-specific indexes that include Telecommunications, Healthcare, Financials, Real Estate, Consumer Discretionary, Consumer Staples, Industrials, Utilities, Basic Materials, and Energy; and the new FTSE ADX 15 Index (FADX 15) – representing the top 15 eligible companies listed on ADX.
The EGX 30 Index is a free-float capitalization-weighted index of the 30 most highly capitalized and liquid stocks traded on the Egyptian Exchange.
The QE General Index is a major stock market index that tracks the performance of the 20 most liquid companies traded on the Qatar Exchange.
The Boursa Kuwait Main Market 50 (BK Main 50) Index is a new Market Capitalization Weighted Index (Index) that will reflect the top 50 liquid companies listed on the Kuwait Stock Exchange.
European stock indices
Some of the most popular European stock indices include the FTSE100 in the UK, the DAX in Germany, the CAC 40 in France, and the Stoxx50, which represents a range of companies across the Eurozone.
The London Stock Exchange, one of the most popular stock exchanges in the world, also has its own stock index - the FTSE100. The FTSE (or Footsie) represents 100 companies from the London Stock Exchange, including 3i, AstraZeneca, Aviva, BAE Systems, Barclays, BHP, BP, British American Tobacco, BUNZL, Diageo, EasyJet, Experian, GlaxoSmithKline, Glencore, HSBC, Just Eat, Lloyds Banking Group, Prudential, Reckitt Benckiser, Rio Tinto, Rolls-Royce Holdings, Royal Bank of Scotland, Royal Dutch Shell, Tesco, Unilever, Vodafone Group, and so on.
The DAX is an index composed of the 40 largest companies on the Frankfurt Stock Exchange, based on their market capitalization and volume order books. The German stock index is managed by Deutsche Borse and prices have been calculated every second since January 1, 2006, by the electronic system Xetra.
Given that Germany is Europe's largest economy, the DAX40 is a very popular index for international traders.
The companies represented by the DAX index include: Adidas, Allianz, BASF, Bayer, BMW, Commerzbank, Deutsche Bank, Deutsche Telekom, Fresenius, Henkel, Infineon, Linde, Lufthansa, MAN, Metro, RWE, SAP, Siemens, VW, and more.
The CAC 40 is the main stock index of the Paris marketplace and was established on June 15, 1988. The CAC 40 index is determined from the prices of the 40 companies with the largest market capitalizations listed on the Paris Stock Exchange.
Since December 1, 2003, the CAC 40 has adopted the floating market capitalization system to align with the way in which major global indices operate. This means that since that date, the number of securities available for purchase on the market for a company is taken into account in calculating the index.
Some of the companies listed on the CAC 40 index include: Accor, Air Liquide, Airbus, ArcelorMittal, AXA, BNP Paribas, Capgemini, Carrefour, Danone, L'Oréal, LafargeHolcim, LVMH, Michelin, PSA, Renault, Sanofi , Sodexo, Total, and more.
The IBEX 35 is the benchmark stock market index of Bolsa de Madrid, Spain's principal stock exchange. It is a market capitalization-weighted index comprising the 35 most liquid Spanish stocks traded in the Madrid Stock Exchange General Index and is reviewed twice annually.
Among the top components are Santander Bank, Banco Bilbao Vizcaya Argentaria (BBVA), International Airlines Group (IAG), Caixabank, Telefonica, Inditex or Repsol.
Finally, if you're interested in trading the Eurozone economy as a whole, there is an index you can use!
Euronext is the main stock exchange in the European area, and the Euronext stock index (the Euro Stoxx 50 index), includes 50 companies from the European area, based on their market capitalization.
Other European indices
While we've listed the most popular European stock indices above, there are a number of other European stock indexes. Here is a short list of them:
- Belgian stock index: The BEL20
- Greek stock index: Athex20 index
- The Danish stock index is OMX Copenhagen 20 (or KFX)
- Dutch stock index: AEX25
- Finnish stock index: OMX Helsinki 25 (OMXH25)
- Irish stock index: ISEQ
- Italian stock index: FTSE MIB
- Luxembourg stock index: Luxx
- Norwegian stock index: OBX25
- Portuguese stock index: PSI 20
- Spanish stock index: Ibex35
- Swedish stock index: OMX Stockholm 30 (OMXS30)
- Swiss stock index: SMI20
Why trade CFDs on indices with CAPEX.com?
Benefit from our deep liquidity – increasing the chance of your larger trades being accepted Access both spot and futures prices with zero commission and leverage up to 1:20 Get spreads from 0.4 points on the US 500 index, and 1 on the US 30 Deal on our award-winning platform and mobile app with integrated tools Give yourself an edge with index price predictions and CAPEX Academy Go short or long to capitalize on falling or rising markets
Summary of Stock Indices
While Index investing can only be done indirectly, CFD trading offers an accessible way of speculating on the price movement of a whole market sector, without actually owning the underlying index constituents.
Index ETFs are very liquid, cheap to own, and may come with zero commissions. They are the perfect set-it-and-forget-it index option.
Indexing on your own requires time and effort for researching and building the proper portfolio and can be costly to implement.
Free Resources
Before you start trading or investing in stock indices, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.
Our demo account is a suitable place for you to get an intimate understanding of how trading and investing work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged securities.