Investors should always look for an edge in the financial markets. The best way to get an advantage is to minimize your risk. Diversity is what professionals use to spread the risk out over multiple assets. Doing so takes the weight of success off of a single investment. For the reason of risk reduction, you should look into what stock indices can do for you. Like others, you’ll find an index easy to trade.
What is a Stock Index—Why Does it Matter?
Indices are traditionally used to capture the health of an entire industry or business sector.
The dollar index, for example, is a measure of the dollar’s strength as rated against a group of other currencies. Together, the relationship of the dollar against a collection of other fiats helps investors. Stock indices work the same, but with modern tools, investors can trade an index, though, it represents multiple assets.
As for stocks, the most popular indices to examine are the Nasdaq Composite, the Dow Jones Industrial Average and the S&P 500. The first thing to take notice of is that each index suggests that a collection of or an entire sector of a stock is measured. Five hundred of the top blue-chip stocks make up the S&P 500, for example. Indices matter because they track the condition of a business market.
When the S&P 500 does well, investors see this as a sign of stock growth. The same is true for the dollar index. Due to its reliability, a strong measure in the dollar index results in other currencies having a weaker overall stance. Though the 450-plus indices that exist for stocks are tradable, they, at first, act as market indicators. Use them to guide your strategies, entries, and exit positions.
Single Certificates, Options or Futures
You can make the most out of stock indices by buying and selling them.
Doing so requires that you take ownership of one of three common orders. At first, you can buy a unit that represents an index. This, however, is only possible for the very rich, and even they won’t find this approach to be strategically wise. Trading a stock index is best done with leverage and, therefore, through options and futures.