What are indices?

An index is a measure of change that shows how a group of underlying assets collectively move. In finance, an index is typically made up of several stocks grouped together due to common features between them, such as industry grouping or geographic location.

An index can be created to track the changing price direction or momentum of shares in a group of companies in the technology sector, for example, and it is illustrated as a single number. This number is also the price of the index for trading purposes, so that people can speculate on the value of groups of different assets.

Benchmarking Performance

Indices are some of the most commonly cited financial assets, and are used to give an approximation of stock market health. Take the S&P 500, for example, which is an index of the 500 largest publicly traded companies in the United States. They often serve as a leading indicator of an economy’s overall health and can be a helpful contributor to analyzing a market’s directional trend.

Similar indices exist for Germany, France, and almost any other country boasting a local stock exchange or equity market. These are useful for trading because they make it possible to take advantage of broader trends in the market. There are indices for entire industries, sectors and sub-sectors, groups of companies from any country, emerging markets, and more.

Adding Indices to your CFD trading

If a trader believes that France will lower its corporate tax, for example, then he or she might buy or sell a CFD that tracks the CAC 40, which is a popular index of the performance of the largest listed French companies.

Although it varies by index, indices are recalculated periodically and rebalanced depending on the size and capitalization of the companies contained within the index. Excellent performance for the index’s largest companies will outweigh poor performance by the others, and the index’s price may increase or decrease accordingly.

Thanks to their broad-based exposure to a number of underlying companies, they can also be a helpful diversification tool when implemented.

Please note: CFDs are leveraged products that involve substantial risk and may result in the loss of your entire balance.

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