It’s not always possible to analyse the market trends by looking through hundreds of stocks to make a calculated decision. This is where the importance of indices comes into play. Considering the stock market, an index is a measure of performance that indicates the type of changes in the market. To create an index, similar stocks are grouped which might be taken from the Australian stock exchange. Of course, the stock selection is broadly classified according to various criteria which includes:
- The type of industry that the stocks represent. This could be tech, agriculture, energy, pharmaceuticals and others.
- The total size of the company. The larger the size, the higher the percentage of the index will be in the listing.
- The total market capitalization of the stocks, higher capitalization value will create a higher percentage for the index.
As the values of the underlying stocks change, so does the value of the index. Suffice to say, the total index value will depend on how well the based stocks perform in the Australian market over the stipulated time.
The Importance Of Indices:
- Rummaging through hundreds of stocks to pick the best one requires a lot of time and effort. For most people, this isn’t practically possible so they rely on the help of an index to select the best stocks. The indices can help investors differentiate stocks based on the type of industry, size and total market cap.
- They represent the trend of the Australian market, or more accurately, how a sector performs when compared to the rest. Since it represents the average stocks of a particular industry, an index can gauge how well that industry will fare in terms of stock prices or other factors.
- It helps reflect the sentiment of the investors for that particular stock and show why there is a sudden plunge or rise in prices.
- It helps investors diversify their portfolios so even a fall in price for one of the stocks will not affect the overall value for the investors. Consequently, it can be a great passive investment for those constrained by time.
Trading Indices With CFDs
CFD trading refers to the type of trading through a financial instrument based on the index. In this way, investors don’t own the instrument but they can invest in the price. To put it simply, investors don’t have to cash in to purchase any underlying asset. Unlike buying one, a contract is formulated which will be based on the movement of the index on the listing. Trading with CFDs is highly beneficial for those looking for a hassle-free trading experience:
- As mentioned before, it does not require investors to buy the asset on which the trade is based.
- They can help investors gain exposure quickly and can save a lot of time by allowing individuals to make trades as soon as the market opens.
- Investors can increase their purchasing power by the use of leverage. Do note that increasing the leverage can create margins for exponential gains. At the same time, it can also give way to losses too so manage the risks accordingly.
As an alternative way of trading, CFDs are not subject to varying fluctuations of higher intensities. This is unlike individual stocks that can rise or fall as a result of poor market performance, bad public image or poor sales. Index CFDs also offer many financial benefits for the investors which include:
- Lower costs of trading and cost margins.
- A more convenient way of index trading.
- Diversification of the portfolio.
- Opportunity to short the index.
- Opportunity to hedge any or all portfolios.
- Leverage trading.