Most people are aware of the popular US, European and Asian stock indexes because they are advertised on the news. However, most people, especially non-traders are unsure of how these stock indexes are traded.
The first index was introduced in 1896 by Charles Dow. This index has now evolved into the Dow Jones Industrial Average that we all know today. Before starting your journey in trading indexes, you need to understand the differences between stock trading and index trading.
What are the Differences Between Index and Stock Trading?
Index trading is trading a handful of stocks that make up an index, through one platform. The index follows a handful of stocks that are used as an indication of the stock market or are a specific part of a stock exchange such as the NASDAQ or technology.
Stock trading is trading stocks of a specific company, with each of the stocks having an individual price. Once you have purchased the stock you own it and it is transferred to you from the seller.
Once you’ve gained experience you will be able to choose whether to trade indices or traditional shares/stocks.
Should I Trade in Indices or Stocks?
To trade indices, you can use an internet based broker/platform. You do not need to go through the traditional channels by using a stock brokerage company. Market trading online has become extremely popular, with retail investors buying and selling indices to diversify their portfolio risks.
Many investors find trading stock indices more rewarding than trading in the stock market; this is because most stock indices generate larger profits. It is also much easier, which is why novices choose to start by trading in the indices. Brokers like EasyMarkets that are regulated in well-known jurisdictions are usually a safer option for new traders. Not only do EasyMarkets offer fixed spreads, they also offer negative balance protection, making them a brilliant choice for beginners. Their trading app also allows you to trade from anywhere in the world.
Another huge advantage of indices is that only limited research is required to trade in the indices. If you decided to invest in the FTSE100 stock market it would take weeks of work and it would be very hard to track all of the assets traded within one country.
However, if you choose to invest in the S&P 100 stock index you would only need to do a technical analysis of the index and it would require minimal management and no tax liabilities.
Stock indexes cannot be traded directly and are only available for information. Data is available for the stock indexes which can be charted, but you cannot make a long or short trade on the stock indices.
An Index is a list of stocks which can be created by anyone. There are thousands of indexes available that track numerous industries and regions. The most important thing to remember is to choose a market that suits your risk level, account size and trading style. Whether you choose to trade in stocks or indices is up to you, but many people choose to start off with indices due to the advantages they provide.