INDICES

The share indices are indicators that provide, in summary, the value of a group of equities. Therefore, we can identify indices as portfolios of securities grouped under certain characteristics, such as the sector they belong to, geographical location, and much more. Each share market index establishes criteria according to which the securities can be included or not in the basket of the same index. The index, therefore, is the synthetic indicator of the shared performance of a given pool of securities, grouped according to defined criteria. When the companies included in an index show positive changes in the price, the entire index will benefit. On the contrary, the index will be damaged in adverse company price movements. The most important and well-known share index in Italy is certainly the FTSE MIB, the acronym for Financial Times Share Exchange Milano Index di Borsa. It includes the 40 Italian companies with the highest level of capitalization. On this index, at least 90% of the trades on the Italian Share Exchange are recorded on average. As you can guess, the value of this share index is crucial to assessing the health of our market. It returns a synthetic indicator of the main 40 companies in our country, conveying the weighted average of the prices of the shares of the major activities of the Belpaese within the value.

Each share index provides an ad hoc criterion to allow or deny entry into its basket. In the case of the FTSE MIB, we have the 40 companies with the largest capitalization in Italy. As regards the FTSE MIB, analyzing it in detail, we are dealing with a "partial index" because it only includes large-capitalization companies. A "partial index" considers only a part of the securities listed on a given market, according to a pre-established criterion. For example, keeping us in Italy, the FTSE Italia Banks is a synthetic indicator that returns the performance of securities linked to banking institutions. In contrast to the "partial indices," we have the "general indices", ie, those that consider the totality of the securities listed on a given market. Remaining in Italy, this is the case of the FTSE Italia All Shares.

Having explored the difference between the partial and general indices, we now concentrate on understanding the three types of equity indexes. Their definition is based on the criteria chosen to summarize the values of the securities contained in the indices themselves. In particular, there are three types of indices: value-weighted, equally weighted, and price-weighted.

Value weighted

The indices are among the most common in the markets because they can define the real trend of the securities contained in the index with greater precision. Their basic philosophy is to guarantee the share relevance and weight proportional to the company's capitalization issuing the share. To put it simply: if we have companies with a higher capitalization within an index, they will generate more influence than companies with a smaller capitalization. In these cases, it is essential to pay attention to the share split events of the companies, as the weight played by a company within the index varies according to its capitalization.

Equally weighted

The indices Equally weighted are less used than their “value” counterparts as they may not reflect the real health of the shares contained in the index. This is because the influence criterion guarantees the same weight in any title contained in the index, regardless of the capitalization of the issuing company. It is not a weighted average but an arithmetic average.

Price weighted

In these indices, the element that affects the index's price is the value of each security. Consequently, neither the capitalization, the number of shares, nor the company's size are decisive. The only thing that matters is the value (price) of each share: the companies with the highest value will have more weight than the companies with the lowest value, regardless of the real strength of the companies themselves. It is correct to state that these indices can give a very untruthful return on the portfolio's performance.

Trading on indices concerns the set of operations that traders put into practice with the primary objective of obtaining profits on changes in index prices. There are many indices that traders can utilize on the financial markets for their trades. All of these indices measure the performance of specific markets, such as equities or raw materials. However, unlike stocks and commodities, it is not possible to buy or sell a single index. In fact, the actual underlying security is not purchased in these transactions, but the average performance of all the securities belonging to the index is speculated. This operation is carried out through tools such as CFDs, a topic that we will further explore in the article.

The main world indices contain almost exclusively blue-chip stocks, i.e., stocks of established companies, considered leaders in their reference market and supported by a high-value capitalization. Here is the list of the main indices on the world market: – Dow Jones: US index, also called "Wall Street", which includes the major companies of the US economy; – NASDAQ 100: another US index of enormous importance, also known as US Tech 100. It contains the 100 most important tech companies in the USA, and it is a value-weighted index, as the calculation of the value is carried out on the weighted average of capitalization; – S&P 500: acronym for Standard & Poor 500, which includes the largest 500 US companies by capitalization; – EURO STOXX 50: index created in 1998 in which the main eurozone companies are included, embracing the main characteristic sectors of the geographical area of reference. Inside there are 50 titles belonging to the following states: Germany, Italy, France, Spain, Portugal, Austria, Belgium, Ireland, Finland, Luxembourg, and the Netherlands; – FTSE 100: an index that groups the 100 largest companies in the UK by market capitalization. In the financial field, it is also known as the UK 100; – DAX: German index, also known as “Germany 40” which contains the main 40 Teutonic companies; – Nikkei 225: index which includes the 225 largest Japanese companies; – Hang Seng: stock index listed on the Hong Kong market and containing the 50 main companies in the Chinese area by capitalization; – CAC40: an index that groups the 40 main French companies based on market capitalization. It is also known in the financial field as "France 40".

Many external forces can directly affect the price changes of a stock market. These are elements that a good investor must consider and be able to analyze synergistically. Here are the main ones: – Global News: natural disasters, conflicts of high global interest, pandemics. These are all elements that can have a negative impact on the indices, especially if they directly concern the reference country. Economic news: important news arrives every day from the economic world, from meetings of senior figures in finance to central banks' decisions on the subject of rates. – Modified index composition: indexes are not immutable in their composition. On the contrary, a company can leave or enter according to the access criteria. These movements can cause the index to fluctuate. – Company news: Even the news about companies contained in the indices themselves can cause changes in the value of the index—publication of financial statements, mergers, changes in governing bodies, and more.

With the FXORO platform it is possible to trade indices through CFDs. Using Contracts for Difference (CFDs) does not mean buying an asset, but speculating on the change in the price of the index itself. The trading activity on indices with CFDs presents, like all investment instruments, benefits and risks. The benefits are represented by the low costs and the possibility of making an instant trading and to take advantage of the financial leverage, a mechanism that allows you to increase your purchasing power. However, leverage itself also represents the most obvious risk of this business: increasing exposure to potential losses. There are two main types of index trading with CFDs: Cash Index CFDs and Index Futures CFDs. Cash CFDs on indices are the preferred indices trading investment for those who want to trade intraday, within the same day. They also have lower spreads. Futures CFDs allow traders to commit to buying an index at a predetermined date and price. This means that you can set the buy (or sell) order according to your assessment of the increase (or decrease) in the value of an index.

Deciding to trade on indices cannot be separated from prior preparation. The advice is to start from a correct and profound update on generic market dynamics, also based on the socio-political events that move them. The second step is to focus on some assets in detail, on which to deepen your analysis by also exploiting the technical analysis tools. Also not to be underestimated is a period of practice Demo, where to learn with tranquility (and virtual money) some concepts and experts test new strategies. Once you have become more familiar with trading on the Demo account, you can begin trading. Here is an example in some steps:

1st step: Opening a position

The initial phase consists in opening a position on the reference platform and choosing an asset, that is an index.

2nd step: Purchase or sale

Once the asset (the index) has been chosen, it is necessary to understand whether to open a buy or sell position. With the buy position (Long) you will get positive results if the index increases its price, on the contrary there will be losses. With the sell position (Short), on the other hand, positive results are obtained if the index decreases its price, while otherwise there will be losses.

3rd step: Conditions

When trading indices, long or short, it is important to set certain conditions: – The quantities of securities on which you intend to trade; – The maximum loss limit (stop loss) reached at which the operation closes automatically; – The level of profit to be reached (take profit) to automatically close the position;

4th step: Monitoring

5th step: Closing

The closing of the operation can take place in three ways: – Manual closing: this can be done independently only when the market is still open. If the market is closed, you can set a close order for the next day. – Automatic closing inserted by the trader: which is activated if the set take profit or stop loss conditions occur; – Automatic closure provided by the broker:these are closures provided by the broker's registration terms that are activated in extreme cases to protect against excessive losses.