An index measures the performance of a group of underlying securities that represent a certain area of the market.
The price of an index shows how these securities move collectively.
For example, the NASDAQ100 index represents the 100 non – financial firms in the United States.
The price of an index is calculated either by using the “Capitalization Weighted Average”, or the “Price Weighted Average”. Most of the index’s prices are calculated using the “Capitalization Weighted Average” method, which means the more a company is worth, the greater its share price has an impact on the index.
The Dow Jones and the ASX indices prices for instance are calculated using the “Price Weighted Average” method, which means the higher the price of a certain share, the bigger its impact on the price of the index.
Some Indices are used as a benchmark to see how a certain economy is doing.
For example, by having a look at the FTSE100 index, we can have an idea if the UK economy is doing great or not, since this index represents the 100 companies with the largest market capitalization in the United Kingdom.
How can you trade indices?
The most common way to trade them is through CFDs, but they are also tradable using ETFs, futures, and options.