The ten most popular stock indexes can be traded in Africa as contract for differences (CFDs) or exchange-traded funds (ETFs) through a regulated online broker. CFDs are associated with high-risk, high-reward and are used by traders for short-term trading strategies. ETFs yield small gains over an extended period and are ideal as a long-term investment instrument for savings and retirement planning.
In this in-depth guide you’ll learn:
- The pros and cons of stock market indexes
- UK-based stock market indexes
- Asian-based index
- What is the VIX Index?
- Australian index
And lots more…
Let’s dive right in…
The pros and cons of stock market indexes
👉 The benefit of stock index trading is you get exposure to a wide range of companies, which allows for diversification and dilutes the risk of financial loss caused by market volatility. If a company in the index goes into bankruptcy, it is replaced by the next largest company outside of the index. The value of the index may drop temporarily, but you do not lose your entire investment as you might do if you invested in individual stocks.
👉 A weakness of stock market indexes is you do not get the high returns you would if you invested in stocks of high-growth companies. Indexes tend to flatten the highs and lows of individual stocks, providing small, stable gains over a long time. Trading stock indexes is less risky than trading individual stocks, making them ideal as an investment vehicle for savings and retirement.
👉 The global market uses the leading stock indexes to gauge market sentiment. They are strong indicators of the economic health of a country or international zone. The stock indexes are used in different ways for fundamental and technical analysis for forex and CFDs trading.
USA-based stock market indexes
What is the Dow Jones Industrial Average (Dow) Index?
👉 The Dow (DJIA) is a vital stock market activity tracker and one of the world’s most quoted indexes in the world. It tracks the movements of thirty (30) stocks of leading blue-chip corporations in the United States.
👉 The DJIA is a price-weighted index, meaning firms with higher stock prices are given greater weight. The prices of thirty stocks are added together and then divided by the Dow Divisor, which counteracts the effect of structural changes. The DJIA provides a snapshot view of the overall direction of US stock prices.
👉 The DJIA is criticised for not being the best indicator of the overall US market because it only includes thirty blue-chip company stocks. Considering over 5 300 stocks are traded on the NYSE and Nasdaq, the DJIA only represents 1 percent of the total US stock market.
👉 The index was created in 1884 by Charles Dow and Edward Jones, initially as the Dow Jones Transportation Average (DJTA). It tracked twelve (12) industrial companies in the railroads, oil, gas, sugar and tobacco sectors. This number was raised to twenty (20) companies in 1916 and thirty (30) by 1928. The thirty companies reflect the most-traded stocks on the Nasdaq and the New York Stock Exchange (NYSE).
What is the S&P 500 Stock Composite Index?
👉 The Standard and Poor’s 500 (S&P 500) index reflects the market capitalisation of five hundred (500) of the largest companies listed on stock exchanges in the United States. It is one of the most quoted indexes and acts as the barometer for the health of the broader US economy and stock markets.
👉 The S&P 500 is a market-weighted stock index, meaning a company’s market capitalization is determined by multiplying the number of shares held by shareholders by the current stock price. The value of the S&P 500 is adjusted to reflect only the amount of publicly traded shares. In early 2020, the S&P 500 represented about $25 trillion of shares in circulation.
👉 The index was created through the association of Henry Poor, who founded Poor’s Publishing in 1860 and circulated an investor’s guide to the railroad industry; and Standard Statistics Company, founded in 1923, which rated mortgage bonds and developed a stock market index made up of 233 company stocks.
👉 The two entities merged in 1941 to form Standard and Poor’s. The Standard index expanded to 500 companies in 1957, and the company was renamed S&P 500 Stock Composite Index. Big names include Apple, Amazon, Facebook, Microsoft, Tesla and JP Morgan & Chase.
👉 Since the 1920s, the index has delivered an average annual total return and compound annual growth rate (including dividends) of 10 percent after inflation. The S&P 500 yields good long-term returns, particularly as an ETF-based index.
What is the NASDAQ-100 Index (USA-100)?
👉 The NASDAQ-100 is a stock market index launched in 1985 by Nasdaq, the world’s first US-based electronic stock exchange for buying and trading securities. Nasdaq offers two indices: the NASDAQ-100 non-financial index and the NASDAQ Financial-100 index, which includes the banking, mortgage loan, brokerage and insurance sectors.
👉 The NASDAQ-100 is a market capitalization-weighted index, meaning company stocks are weighted according to the total market value of their outstanding shares. The index is made up of 102 of the largest non-financial companies listed on the Nasdaq electronic marketplace.
👉 The NASDAQ-100 includes companies in the technology, telecommunications, retail, industrial, healthcare, transportation, biotechnology, media and services sectors. The majority of the big tech companies are represented in the index, including iconic brands such as Apple, Amazon, Microsoft and Alphabet (parent company of Google).
👉 The NASDAQ-100 index has a reputation for strong, reliable long-term performance, and it is a popular investment vehicle for long-term retirement planning. The index acts as a barometer for economic growth and stability in developing nations worldwide, not only the United States.
What is the VIX Index?
👉 VIX is the stock market’s name for the Chicago Board Options Exchange (CBOE) Volatility Index. Traders and investors also call it the Fear Index because it is the most accurate barometer of market volatility and sentiment in the United States.
👉 VIX measures investors’ anticipation of market volatility in real-time, based on the S&P 500 Index. It is a forward-looking gauge as it only shows implied volatility for the next 30 days. The CBOE volatility index is calculated using the prices of SPX index options, which is a good measure of volatility. When the VIX value increases, investors expect the S&P index to fall. When the VIX value decreases, they anticipate the S&P 500 will stabilize.
👉 The VIX Index is quoted as a percentage and indicates the expected movement of companies indexed in the S&P 500 over the next thirty days. A VIX of 25 means that the S&P 500 is likely to move up or down 25 percent or less within the next 30 days.
UK-based stock market indexes
What is the FTSE 100 Index (UK 100)?
👉 The Financial Times Stock Exchange 100 Index (FTSE 100) is the most widely-used stock market indicator in the United Kingdom and Europe. The share index is referred to as the UK-100 or the Footsie in the stock trading world. It tracks the movements of none hundred (100) of the largest companies listed on the London Stock Exchange with the highest market capitalization.
👉 The FTSE 100 Index was designed in 1984 and is maintained by the FTSE Russell, a wholly-owned subsidiary of the London Stock Exchange (LSE) and a joint initiative between the exchange and the London Stock Exchange. FTSE Russell is a British-based enterprise that offers various stock market indices and data services.
👉 The FTSE 100 is a market capitalization-weighted index, meaning company stocks are weighted according to the total market value of their outstanding shares. The total market value for listed companies is determined by multiplying the share price by the total number of shares that have been supplied.
👉 A Footsie decline means the stock value of the largest companies listed on the LSE has decreased. When it hits a high, the total value of all the companies has increased.
👉 The top five companies by market capitalisation on the FTSE are Royal Dutch Shell, Unilever, HSBC Holdings, AstraZeneca and BP. The majority of indexed companies are domiciled in the United Kingdom, but several foreign firms are based outside of the UK jurisdiction.
👉 The UK-100 index acts as a strong indicator of the strength of the indexed companies and the United Kingdom’s economy in general. It provides solid and stable returns and is ideal as a long-term retirement planning instrument.
What is the FTSE 250 Index (UK 250)?
👉 The FTSE 250 is another index provided by FTSE Russell. It comprises the one hundred indexed companies in the FTSE 100 index and the following 100 largest companies listed on the London Stock Exchange. It also goes by the name UK-250.
👉 The FTSE 250 is also a market capitalization-weighted index, meaning companies are indexed based on the value of the shares held by shareholders. The index is skewed towards investment trust firms and contains several multinational companies with significant interests outside the United Kingdom jurisdiction.
👉 The UK-250 is viewed by many fund managers and investors as a more reliable yardstick of UK market performance than the UK-100, mainly because it includes a broader representation of companies. The UK-100 is also skewed towards large foreign multinationals that operate outside of the UK jurisdiction.
Australian index
What is the S&P/ASX 200 Index?
👉 The S&P/ASX 200 index tracks the price movement of two hundred (200) of the largest, high growth companies listed on the Australian Securities Exchange (ASX) by market capitalisation, the total value of the shares actively traded on the global market.
👉 The Australian Stock Exchange Limited was founded in 1987. ASX was launched in 2006 after the merger of the Australian Stock Exchange and the Sydney Futures Exchange. The ASX 200 index is managed by Standard & Poor’s and acts as a strong indicator of the country’s economic health.
👉 The ASX 200 index is a float-adjusted and market capitalisation-weighted index. The index is skewed towards the mining sector, mainly because mining drives a significant portion of the country’s GDP and has produced two of the world’s biggest mining companies: Rio Tinto and BHP Billiton.
Asian-based index
What is the Nikkei 225 Index?
👉 The Nikkei 225 Index tracks the movements of 225 of the largest publicly-listed companies in Japan. It operates in Japanese Yen and comprises companies for a wide range of industry sectors.
👉 The Nikkei 225 Index is the most robust measurement of economic health in Asia due to the significance of the Japanese market. It is a price-weighted index, meaning companies are weighted based on their share price and not their total free-float market capitalization. The higher share prices are given greater weight.
👉 The price of 225 company stocks are added together and then divided by a divisor to counteract the effect of structural changes. Iconic brands indexed on the Nikkei 225 Index include Sony, Honda, Nikon, Suzuki and Olympus.
👉 The Nikkei 225 Index provides a strong indication of economic prosperity in Asia, but it is sensitive to fluctuations in the Yen. Most multinational companies in Japan are major exporters and are hurt badly when the Yen is too expensive for the global markets.
European-based index
What is the DAX 30 Index (Deutscher Aktien Index)?
👉 The DAX 30 measures the share price performance of thirty (30) of Germany’s largest, most significant enterprises listed on the Frankfurt Stock Exchange (FSE). The DAX represents about 80 percent of the total market value of shares traded on the Abkürzung für Deutscher Aktienindex, which is the German stock exchange.
👉 The DAX is a price-weighted index, meaning companies are weighted based on their share price and not their total free-float market capitalisation. The higher share prices are given greater weight. The share prices are generated on a second-by-second basis by Xetra, an electronic trading system. Xetra uses the free-float method, meaning market capitalisation is determined by the equity price multiplied by the number of readily available shares.
👉 Companies indexed on the DAX are primarily blue-chip multinational companies, including iconic brands like BMW, Volkswagen, Lufthansa, Adidas, Siemens, Merck and Bayer. The index is a significant barometer for the health of German and European stocks and the German economy in general.
What is the Euro Stoxx 50 Index?
👉 The Euro Stoxx 500 is a market index that measures the performance of fifty (50) of the largest, most liquid companies that are Eurozone members. The index was created by Stoxx, which the Deutsche Börse Group owns. It represents blue-chip firms referred to as Supersector leaders in the Eurozone and is dominated by companies operating in Germany and France.
👉 The Euro Stoxx 50 is a market capitalization-weighted index, meaning constituent stocks are weighted according to the total market value of their readily available shares. The index is based on free-float market capitalisation, representing the absolute value of shares listed rather than the full size of the corporation.
👉 The index represents nine Eurozone countries; Germany, France, Italy, Luxembourg, the Netherlands, Italy, Spain and Ireland. Companies indexed on the Euro Stoxx 50 include iconic global brands such as SAP, Total, Unilever, Allianz, ASML Holdings, Moët Hennessy Louis Vuitton, Siemens and L’Oréal.
👉 The Euro Stoxx 50 Index was created in 1998 and today represents about sixty (60) percent of the Euro Stoxx Index. It serves as an essential indicator of market sentiment for the Eurozone in general and the health of its members.
How should you trade stock indexes?
👉 A stock index is a collection of company stocks that tracks price movements in the whole market or a market sector. Stock indexes are traded using various financial instruments, including contracts for differences (CFDs), exchange-traded funds (ETFs), futures and options.
👉 Retail traders access stock indexes via an online forex and CFDs broker and trade the different financial options on an electronic trading platform like MetaTrader 4 or MetaTrader 5.
FOREX TRADING AFRICA DISCLAIMER
Forex and CFDs are complex instruments, and trading these instruments come with a high-risk warning. Trading forex and CFDs involves a high risk of losing money rapidly due to leverage and margin. You need to understand how forex trading works and decide whether you can afford to take the risk of losing money on trade orders that do not go your way.
Forex Trading Africa annually reviews brokers and financial instruments and provides information to help traders and investors make better decisions when trading on global markets. The information is published to help improve your knowledge and understanding of international multi-asset trading and market participants.
