What types of indices exist?

Written by Volodymyr

Updated 5 months ago

There are different types of stock indices that suit the needs of specific traders: global, regional, national, stock, sector, currency, and sentiment.

In addition to stock indices, you can also trade commodity and bond indices.

Stocks

A stock index is calculated based on the prices of the stocks that comprise it. These indices list the criteria that a company must meet to qualify for inclusion.

Benchmark stock market indices are often mentioned in financial news reports. They are considered indicators of business confidence, performance, and economic health.

Indices that are tied to specific industries are also popular among traders. For example, the US Tech 100 index includes the largest non-financial companies listed on the NASDAQ stock exchange. Because its composition is focused on technology companies, this index is often used as a barometer of the performance of the US technology sector and is one of the best options for stock index trading.

Commodities

Indices that track commodities are typically based on spot or futures contracts that represent the prices of commodities such as oil, gold, silver, copper, coffee and others.

For example, the S&P GSCI Oil Index provides investors with a benchmark as the U.S. Oil Fund tracks daily changes in the price of West Texas Intermediate (WTI) crude oil.

There are also commodity-linked stock indexes that track stocks in the commodity sector, such as mining corporations or oil and gas producers.

For example, the Energy Select Sector SPDR Fund (XLE) tracks the Energy Select Sector Index, which consists of U.S. companies with large market capitalizations in the oil and gas markets, as well as companies involved in energy equipment. The VanEck Junior Gold Miners ETF (GDXJ) invests in small gold mining stocks, using the MVIS Global Junior Gold Miners Index as its underlying index.

Bonds

Bonds are fixed-income debt securities. When investors buy bonds, they are essentially lending money to the bond issuer, with an additional interest rate included in the repayment.

Bond indices are designed to measure the performance of specific sectors of the bond market, such as corporate, government, and municipal bonds. The S&P 500 Bond Index, which tracks the performance of corporate bonds, is designed to be a proxy for the S&P 500 and takes into account the market yield of bonds.

Currencies

Currency indices track the value of a base currency relative to other currencies. For example, the U.S. dollar index (DXY) measures its value relative to a basket of other currencies. It is the leading international benchmark for the value of the US currency.

Other examples of currency indices are the Euro Index (ECY), the British Pound Sterling Index (BXY), etc.

Market Sentiment

Indices that are tied to investor sentiment track market sentiment, such as volatility. One of the most well-known market sentiment indices is the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), which measures the volatility of options contracts on the S&P 500 Index.

A rising VIX means that the stock market is experiencing increased volatility, which is usually associated with fear and sell-offs. When the VIX falls, stocks are usually stable.

Index trading gives traders access to a range of assets in a single basket. Some stocks in the index may fall in price while others rise. This diversification can smooth out volatility to some extent.

Index values fluctuate each trading session, but they generally do not rise or fall very much unless there is a major change, such as a market crash, major geopolitical event, or natural disaster.

Diversification makes index trading less risky than trading individual stocks. If you trade a particular company and it goes bankrupt, you could lose your investment. But if one company in the index no longer meets the required criteria, it could be removed from the index.

We wish you successful trading with ArtСap !

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