What are Stock Market Indices?
Stock market indices are essentially a group of selected stocks listed on a stock exchange. While there are global and national indices, the most common stock indices represent a specific section of the stock market. The price of an index is calculated based on the stocks it represents. However, not all stocks may be treated equally.
Mostly indices are market-capitalisation weighted, which means they assign weight based on the market cap (calculated by multiplying a company’s share price with the outstanding shares) of the companies.
Among the most popular market-cap weighted indices is the S&P 500. Other indices may be price-weighted, in which the stocks are weighted in proportion to their respective share price. An example of this is the Dow Jones Industrial Average (DJIA), which assigns more weight to companies with higher share prices.
Advantages of Investing in Stock Market Indices
Stock market indices provide an easy way for investors to gain exposure to various stocks traded globally. Benefits of trading stock market indices include:
- No need to research individual company statements.
- Offer more exposure for the same amount of funds invested.
- Trading in stock market indices is less volatile than trading in individual stocks. Despite this, there’s adequate volatility for traders to adopt various strategies and seek attractive trading opportunities.
- Stock market indices offer a way to accomplish portfolio diversification without having to invest in different stocks.
- Using indices, traders can take advantage of opportunities in the global equities markets.
- Offer a way to hedge existing stock exposure and dampen the impact of volatility.
- Stock market indices have real-time pricing, as they are linked to actual stock market performance.
- Trading opportunities in both bullish and bearish markets, as traders can sell short or go long depending on the direction they expect the market to move.
Scalping Strategy for trading the DAX n’ DOW
The DAX n’ DOW are among the most popular indices for short-term trading and traders often use scalping with both these Indices. Scalping is an intra-day trading strategy where traders enter and exit positions several times in a day, with the aim to leverage small price changes.
The DAX30 tracks the value of the 30 most liquid companies listed on the Frankfurt Stock Exchange (FSE), which is the world’s tenth largest stock exchange by market capitalisation.
What Moves the DAX30?
- Global macroeconomic factors
- Eurozone economic data released by the European Central Bank (ECB)
- Global and regional trade news, like tariffs on steel
- Economic dependencies between asset classes like oil and metals
- Currency wars affecting the bottom line of exporters, as Germany is predominantly a manufacturer and an exporter
Dow Jones Industrial Average (DJIA)
The Dow Jones Industrial Average, or simply the Dow, consists of 30 largest publicly traded companies listed on the NYSE and the NASDAQ.
What Moves the Dow?
- US economic data releases by the Federal Reserve
- World events like natural disasters, political unrest, US presidential elections
- Trade-related uncertainties – The US is a net-importer and has bilateral trade relationships with many countries like Canada, China and Mexico.
- Major price movements in heavy-weighted stocks, particularly in sectors like tech, consumer goods, finance and healthcare.
- US Dollar Index