what are indices ? A Guide for Beginner

what are indices

what are indices? Indices are a measurement of an exchange share group’s price performance. For instance, the FTSE 100 tracks the London Stock Exchange’s 100 largest. An index is arrived at from the constituent stock price, generally as a weighted average. Any index stipulates the requirements a company ought to meet to qualify for inclusion. An index mirrors the state of a wide industry sector or a national stock market in its entirety. What are indices? How do you trade them? We will go deep into these questions. 

Making sense of indices 

Regardless, you are aiming to track a market’s performance, assess your portfolio, or invest in index-linked investment products – indices are investment tools you cannot do without. Indices may serve as – 

  • Market indicators; 
  • Performance benchmarks; 
  • The basis for index-linked investment products;
  •  Research & analysis tools. 

Market indicators

No information is more widely reported relative to the ongoing The Dow and the S&P 500 levels, save perhaps the weather. And there’s a good reason people pay attention. 

Indices offer both real-time information regarding the financial markets’ health and a periodically updated snapshot of market direction . equity indices appreciate, given that investors buy more shares of the indices’ component stocks relative to their selling, and their prices climb. Conversely, when index levels decline, the opposite takes place. 

Is it a good or great day when the Dow is up 200 points? When investors discuss market performance, they generally cite points an index won or lost. However, the real effect of such numbers depends on the preceding index numbers. PrimeFin, ABinvesting, and Investby help you understand market data.

Performance benchmarks

Indices permit investors to assess the performance of actively managed funds, securities, and investment portfolios corresponding to the market. Hence, indices behave as yardsticks or benchmark measures. For instance, major institutional investors, individual investors, and financial advisors benchmark their investments to indices to decide if they are outperforming or underperforming the markets they invest in. 

Why are performance benchmarks needed? 

Professionals make use of indices to benchmark the portfolios they manage against market performance. Individual investors may also assess how their investments are performing compared to the market using indices as a dependable reference point. 

Why does going for the right benchmark count? 

To compare an investment portfolio and an index insightfully, it is vital that we use the right benchmark. For example, it would be wrong to compare a mutual fund’s performance that invests mainly in mid-sized companies to the performance of an index that tracks large or small-sized companies. 

 What are indices? There are so many of them – and for a good reason. Each index gauges a particular market, market segment, or investment strategy in which investors may opt to invest regardless of institutional or individual. 

The basis for index-linked investment products

The number of indices keeps on growing since there is growing hunger for new approaches to investing in capital markets with index-linked investment products, like ETFs. 

Being aware of the difference between an index and an index-linked investment product is vital for making sense of both indices’ nature and the investment products tracking them. Understand ETFs with PrimeFin, ABinvesting, and InvestBy.

Research & analysis tools

Given that indices are stable and universally recognised measures, they are where analysts and market participants join to assess trends, argue the merit/demerit of consensus, and produce proprietary investment strategies. 

All manner of market professionals uses index data as the basis of assessing market trends and behaviour. 

Financial analysts might make use of index data for sector/company attribution to decide what is driving individual stock prices, making buy/sell recommendations. 

A hedge fund analyst may use real-time data to make out quantitative signals historically standing for buy/sell opportunities. 

An index tracking healthcare costs/jobs might influence a government official’s policy views. 

Indices for all purposes 

 What are indices? There are indeed indices for every corner of the market you could think of. However, indices generally fit into a handful of broad categories amenable to segmentation and cross-segmentation. 

Owing To their wide availability, indices have been important to the proliferation of passive instrument products. Earlier, passive investing stands for buying shares in an index fund connected with the US market. However, now you can invest in diverse index-linked products across diverse asset classes and investment strategies. 

What are indices? Why are they all around?

Investors often ask the following:

  •  Is the stock market in sound health? ; 
  • What’s up with the bond market? ; 
  • Are commodity prices going up?

The answers to these questions concern indices. 

Indices are meant to gauge market performance. For example, the closing level of the Dow Jones Industrial Average offers you a sense of what takes place on a particular day in the US stock market and the situation of the US economy outlook at any particular point in time. 

As a matter of fact, indices may affect your financial life in diverse ways. For example, the S&P 500’s varying value may decide the interest you earn on your market-linked certificate of deposit or the capital gains you realise on an ETF. In addition, government indices decide how much is withheld from Social Security paychecks and the extent to which the variable rate on a mortgage loan will change. 

What are indices? an index precisely defined 

An index is a group or basket of securities, derivatives, or other financial instruments that stand for and gauges the performance of a particular market, asset classes, investment strategy or market sector. Put another way, an index is a statistically representative sampling of any observable securities set in a particular market segment. 

For instance, the well-known S&P 500 stands for the US Equity market’s large-cap segment. Given that the value of index securities moves up or down, the numerical value, or the index level, varies to mirror that movement.

 What are indices? Their types 

  • Broad market indices ; 
  • Sector indices; 
  • Strategy and thematic indices; 
  • Factor indices; 
  • Fixed income indices; 
  • Commodity indices. 

Broad market indices

Broad market indices track large market segments or a major asset class. Some instances are S&P 500, the S&P Global BMI (Broad Market Index), the S&P/TSX Composite, the S&P/ASX 200, or the S&P GSCI for the commodities market. 

Sector indices

Sector indices track industry-based market segments, dividing broad markets into narrower categories, such as the health care and tech sectors. These indices may track at an even more particular level, permitting investors to gain exposure, not just to tech, but particularly to software companies. Sector differentiations drill into industry groups, industries and sub-industries to offer the most granular market views. 

Likewise, indices compartmentalise global markets into countries and regions, or capitalisation ranges based on stock size (large-cap, mid-cap, and small-cap) or even into investment styles. The latter include growth and value stocks. 

Strategy and thematic indices 

Strategy and thematic indices are meant to imitate an investment strategy or grab hold of a particular market segment. Thematic indices frequently stand for market niches or specialised themes like clean energy, infrastructure, or biotech stocks. Strategy indices frequently apply alternative methodologies or play on fundamentals. 

Factor indices 

Factor indices, including low mortality, quality, value, and momentum indices, take aim at non-market risk factors. This is in opposition to the return arising from the risk associated with the broad market. Currently, investors may access factors both individually and in combination, tapping into a universe of sophisticated strategies that were once available only thru active management. 

Fixed income indices

Fixed income indices are meant to track diverse bond market segments, which is ongoing redefining itself as a more transparent and easy-to-access asset class globally. The fixed income market and the indices that track it are famous for diversification, lower volatility, and generating benefits. 

Commodity indices 

Commodity indices can be differentiable from equity and fixed income indices . They track real, measurable assets whose prices are driven only by international supply and demand. These liquidity-seeking indices may range from equal weighting to grab hold of liquidity benefits and diversification, factor-weighted approaches, and modified roll strategies. Hence, commodity indices are vital benchmarks for gauging many asset allocation decisions’ inflation risk management component. 

How to trade indices? 

Seasoned traders are acutely aware of major US, European, and Asian stock indices. Even inexperienced traders will have in all likelihood have heard of indices reported in the news. Instances of minutely observed indexes globally. Begin indices trading with PrimeFin, ABinvesting, and InvestBy.

While the majority of traders recognise the index names, many new traders do not know how the indices are traded. They frequently assume that they are traded like individual stocks. 

Nonetheless, indices are not traded directly. Rather, they exist for informational; purposes only. Thereby, we have a way to a stok group’s performance. Indices market data can be charted like any other stock. However, there is no method to make a long or short trade on the actual stock indices. Here’s where financial products become relevant. Futures and options contracts are therefore used to trade indices movements. 

How to trade indices? : spotting trading opportunities 

Making sense of the correlation between indices 

Region-based or sector-based indices serve as prime indicators for existing market sentiment. Given that, nevertheless, economies are currently intertwined, it’s small wonder that indices are highly correlated. 

There is a correlation that’s easy to spot between indices’ price patterns and international economic events. For instance, you may know where the DAX is trading at this moment or if it opened lower or with a bullish gap. However, how would you interpret this as a trader, and how will you take advantage of the opportunities behind the numbers? 

Scanning the indices markets

Besides its current price, the most vital thing about an index is the daily change (as a percentage) , and the number of points it has moved up or down since the markets opened. 

Let’s take a look at DAX, for instance. If you see the economic outlook for Germany as positive, you would purchase DAX CFDs with the expectation that German companies would haul the index price up.  

Indices may not appreciate as a result of real economic growth, but simply because of increased risk appetite to own risky assets. These deviations, nonetheless, do not last long, and a price correction follows. As a result, traders frequently compare diverse regions’ indices performance to spot and make the most of opportunities. 

DAX & S&P 500 correlation

The S&P 500 index is deemed a valuable barometer of the US Equity market. This is because the index stands for the strength of the companies contained in it. Likewise, DAX mirrors German performance. 

How to trade indices?: breakout strategy 

Active index investors use breakout trading to take a position inside a trend’s early stages. As a rule, the strategy can be an initiator for important price moves, volatility expansion. When managed attentively, these may provide limited downside risk.

 A breakout is a price moving outside a defined support and resistance level with increased volume. A support level is where a share price has shown the property of bouncing back after declining. The resistance level is where the price has rebounded towards the downside once the price has risen. The breakout trader will enter a long position on an index. This happens after the price breaks above resistance or enters a short position after the price breaks below support. 

The index will be more volatile once the price moves beyond one of these barriers. Prices generally trend in the breakout direction. Learn more about breakouts through demo trading with PrimeFin, ABinvesting, and Investby.

Position trading indices 

Position trading usually is concerned with buying and holding an index for a longer time duration. This may take longer than weeks. Consequently, a position trader is less involved with short term market changes. With position traders, there’s a greater possibility for profit. 

However, holding a position for a considerable time may also increase inherent risk. Therefore, position traders take a position in an index prior to or following a critical event. 

Trend trading indices 

Just like day trading, trend traders will try to profit from short to medium-term trends that affect the index. Traders just need to take a bullish or bearish position. Trend trading, the trader just ought to keep his position open as long as the trend goes on. Stop losses and guaranteed stops shield profits and pare down losses in times of trend reversal. 


There are reasons indices are popular. First, indices simplify the research process. You only have to watch an index to see how sub-segments of related companies are performing. Indices permit investors to gain exposure to commodities. Also, index instruments like ETFs make easy diversification possible. Finally, indices are less riskier than an individual stock. The failure of large companies in an index, too, does not have a measurable negative impact. How to trade indices would interest you if you seek to be fully free of the risk of bankruptcy. 

Trading View

Top Brokers