Indices Trading-Should you go for it?

Indices Trading Should you go for it

It is the last month of the year 2016 and you are all set to review your financial losses and gains of this year and plan for the upcoming new 2017 with proper planning for investment. When I look at my financial review and how much I have invested in 2016 then what I feel is I had only gone for safe investments like bank fixed deposits. When I asked my bank advisor as which investment can make my money grow more rapidly and she answered go for Indices Trading. Now this let me dig into it so here I bring some information on this trading and should you go for it or not.

Let us first therefore understand as what is Indices Trading?

Indices trading means trading in the Stock Index. If you want to know what is Index then an index is a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market. So here at Indices trading you are are trading on a group of stocks from different companies and the value of your investment portfolio depends on how well the grouping of stocks is doing.

Stock indices depend on many factors for their values. One is the geopolitical situation. An unstable nation will inevitably have lower stock values than stable ones. Another is the credit rating assigned by international consultancy firms like Standard and Poor. Yet another is the housing or real estate industry, which reflects the changes in a population’s living standards.

While as an investor you need to keep track of all these and watch for depends on if investing in the short-term or the long-term. Short-term investors focus more on consumer sentiment. At the same time, long-term investors tend to watch long-term political and economic changes.

Types of Indices Trading

There are basically two types of Indices trading: Short term Indices and Long term Indices trading. When you invest in short term indices trading, what matters most to your portfolio is consumer sentiment. Consumer sentiment is the key to high returns in short-term indices trading. As fast as consumer sentiment spirals down, it can shoot up to incredible highs in short amounts of time.

Short-term trading can make record profits but can also be of disadvantage on the other hand when off all the factors influencing stock indices, nothing can change as fast as consumer sentiment. Therefore, there is comparatively more risk.

The other type is Long-term indices trading and this depends on compounding profit over a long period of time. This factor can make you feel relax through short-term civil unrest, short-term market booms-and-busts, and quick turns in consumer sentiment as the mindset of long term trader  is to “wait-and-see.”

But this trading is also somewhat risky but not all and you need to watch over your indices to make sure they are compounding profits, not losses. Also the wait-and-see attitude can be deadly, as geopolitical situations can get out of hand like the Syrian civil war but that is an exception.

So should you go for it?

What it depends on Indices trading is what you want from your investment portfolio, and when you want it. While long-term investing is definitely safer in that it can weather a number of short-term storms, short-term investing can bring in more profits in a shorter amount of time.

So when you set up your investment portfolio in indices trading, you should better make it clear whether you will plan for the short-term or the long-term. Short-term trading brings larger returns in shorter amounts of time. On the other hand, long-term investing has the benefit of lower risk and lower short-term stress.

What is the process of Indices Trading?

You need to take multiple stocks into account rather than a single company when going for such trade. Indices work in a similar way to many other Spread Bet and CFD products. Like the individual stocks, which they are comprised of, traders can take positions dependent on whether they think that the value of the index will go up or down. Again, as with individual stocks the aim is to either ‘sell’ at a higher price than one ‘bought’ at or alternatively to ‘buy back’ at a lower price if one originally ‘sold’. All the stocks listed on the index will be included in the ongoing calculations to determine the current level of the index, with the index rising or falling in value depending on the current strength or weakness of its component stocks.

One thing to remember is that because indices are made up of a number of different stocks, the volatility of an index can be quite high, due to constantly moving share prices. However, for the same reason it is rare for indices to move by more than a couple of percentage points on a daily basis, since it’s unusual that all stocks on an index would experience sharp movements in the same direction at the same time. There are occasions, however, when this does happen like the stock market crashes in the 20th and 21st centuries.

What strategies you should apply for Indices Trading?

When trading on an index, one is making trading decisions based on the combined value of a portfolio of stocks from a range of companies, rather than individual stocks from a single company. So what you should do is a bit of research on relevant market sectors.

You need to examine that index’s component parts; is the index composed of shares from a range of industries, or do many of its shares belong to a particular market sector? The answers to these questions will give you a better understanding of the ways in which the value of an index may be influenced. Changes to the prices of commodities related to these sectors might lead to commodity-related stocks rising or falling, and so could significantly affect the value of the index.

When deciding which index to trade, it is also worth considering the number of listings that make up an equity index – the number of companies listed on an index can range widely; some will only have a few tens of companies, whilst others can contain thousands.

Also study the relationship between currencies and Indices and have an understanding of an index’s sensitivity to currency rates, as there is typically a correlation between the relative strength of a country’s currency and the value of its domestic indices.

Also it is better to search for correlations between commodities and a country’s domestic index as the relative value of certain currencies can be susceptible to change as commodity prices increase or decrease. It is advisable to study the movements of commodities that may affect the value of the index you are trading. Although correlations may fluctuate from day-to-day, over the long term, strong trends tend to occur, and searching and analysing these patterns could aid you in making better trading decisions.

You need to also look out for changes to Index listings as the stocks listed on an index are subject to change over time due to factors such as market capitalisation and mergers and acquisitions. So if you are into the theory no gain without risk then obviously you should go for it.

Let’s get started...

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