The basics of indices trading

Listed here are the major world financial centres, as well as links to the major exchanges, followed by their respective indices and a short glossary. The first section of this Sticky, ‘What are Indices?’, emphasised the importance of understanding the number and type of stocks in an index, as well as the way in which it’s calculated. This is important as it can skew the ‘message’ being conveyed. For example, it doesn’t necessarily follow that all – or even the majority – of stocks listed in an index weighted by market capitalisation will close higher, just because the index itself closes higher.

Standard and Poor’s and Morgan Stanley are known as the world leaders in the production of economic data, which is used throughout the world’s financial markets. In late 1999 the two organisations came together to provide an industry standard classification system known as the Global Industry Classification Standard, or GICS.

There are literally hundreds of thousands of indices covering any company in any sector or industry you care to imagine, and it is not the intention to discuss these here. What we will concentrate on however, are the main indices which relate to the respective financial exchanges, plus a number of the more commonly referred to indices you might encounter in your trading.

The list below provides links to exchanges in the main financial centres of the world.
The London Stock Exchange (LSE) is the oldest stock exchange in the world, listing around 3000 companies.
The New York Stock Exchange (NYSE) is the largest stock exchange in the world by dollar volume with over 2500 listed securities. NYSE is operated by NYSE Euronext, the holding company created by the combination of NYSE Group, Inc. and Euronext N.V. NYSE is a world leader for listings, trading in cash equities, equity and interest rate derivatives, bonds and the distribution of market data.
The Tokyo Stock Exchange (TSE) is the second largest stock exchange market in the world by market value. Lists 2,271 domestic companies and 31 foreign companies, with a total market capitalization of over USD $5 trillion.

Because there are numerous indices around the world, here on T2W, there are four sub-forums within the main Indices forum, in which specific indices are discussed: US Indices for the Dow, Nasdaq and S&P etc., UK Indices for the FTSE, European Indices for the DAX and CAC etc. and Asia-Pacific Indices for the Hang Seng and Nikkei etc. Below is a description of some of the best known and most commonly traded indices.

Also known as the Footsie, it’s official title is Financial Times Stock Exchange Index. There are too many to mention, but the main ones of interest would be the FTSE100, FTSE250 and FTSE All-Share. The one referred to most by traders is the good old Footsie 100, which reflects the value of the top 100 companies listed on the London Stock exchange as valued by market capitalisation.

In trading terms, people either trade FTSE futures, futures options, or related instruments produced by Spread Betting (SB) companies that are derived from either the cash index or the futures.
For more info’: FTSE

The Dow Jones Industrial Average is commonly referred to simply as ‘the Dow’. As the name suggests, it is not an index at all, it’s an average. First created by Charles Dow in 1896, it was originally made up of twelve stocks, through the years this became twenty, and now consists of thirty of the top US ‘blue chip’ companies. Unlike the FTSE100, it is a price weighted index and the total value of the stocks is ‘averaged’ using a mathematical formula. It’s the best known of the US indices, but far from the most important, due to the obviously small representation of the whole market.

Traders will use futures – e.g. the YM e-mini contract traded on the Chicago Board of Trade (CBoT), futures options or, again, a SB derived instrument based on either on the cash index or the futures index.
For more info’: DOW

The S&P 500
Commonly known as the Spooz, and widely regarded as the benchmark index which reflects the overall sentiment of the US market. It consists of a representative sample of 500 leading companies in the main industrial sectors of the market. With a history that dates back to 1923, the index as it stands today was established in 1957 when it was increased from 223 companies up to the present figure of 500.
For more info’: S&P

Related indices are the Chicago Board of Options Exchange (CBOE), Volatility Index, known as the VIX – which is a measure of expected market volatility and the S&P Banking Index, known as the BIX – touted by many as a useful indicator of the overall S&P500.

Traders can choose futures, futures options, SPY – the Exchange Traded Fund (ETF), SB companies or the baby brother of the Spooz which is the E-mini S&P500, commonly known as ES. This is the exclusively electronically traded instrument available via the Globex Exchange, and is perhaps the most widely traded futures instrument in the world.

The Nasdaq
The Nasdaq Composite index is the best known technical index in the world. Sometimes referred to as the ‘Comp, it contains all stocks listed on the exchange, which is currently over 4000. The Index was born in July 1984 at a base level of 100! The Nasdaq 100 is another well known index of the exchange which represents 100 of the largest non-financial companies listed on the exchange based on weighted market capitalisation. Another Nasdaq related index is the Phillips Semi-conductor Index, also known as the SOX. This is highly regarded as a useful indicator of overall market sentiment.

This market can easily be traded through the Exchange Traded Fund QQQ, commonly referred to as The “Cubes”, which tracks the Nasdaq100 index. Alternatively traders can use futures contracts, options or the well known SB derivative contracts.
For more info’: NASDAQ

The Dax
The Dax reflects the German blue chip segment comprising the largest and most actively traded German companies that are listed on the Frankfurt Stock Exchange. It was established as the benchmark German index in 1959 when it took over from the Borsen-Zeitung Index. Only the publicly available or “free float” stock issued is taken into account when assessing companies for inclusion in the index. Mainly traded through futures and via the usual SB company instruments.
For more info’: DAX

The Eurostoxx 50
This is the index prepared by Dow Jones & Co. which represents 50 of the top companies traded on the Eurex Exchange. These are only companies from Continental Europe and so exclude UK companies. Nokia is a market heavyweight in this index and, as a result, any activity related to this stock has a direct impact on the whole index.
Mainly traded via futures contracts.
For more info’: EUREX

The Nikkei 225
The Nikkei 225 Stock Average is like the Dow in not being a true ‘index’. The value is calculated as the summation of the values of 225 blue chip companies listed on the Tokyo Stock Exchange, divided by a numerical divisor.
Again, tradable via futures, futures options and through the various SB company instruments.
For more info’: NIKKEI

The Hang Seng
The leading index of the Hong Kong Exchange. It is weighted by the market cap’ of the 33 largest companies listed on the exchange. As such, it is dominated by the largest company on the market, which is HSBC. As a result of this the futures contract has a much greater volatility than other instruments.
For more info’: HANG SENG

The CAC 40
The index which represents the performance of the Paris Borse as a reflection of the value of the top 40 companies of the French Exchange.
For more info’: CAC 40

The ASX200
This is generally accepted as the benchmark index for the Australian Stock Exchange. It’s official title is the S&P/ASX200, and is the index as calculated by Standard and Poor’s to represent the value of the top 200 companies listed on the exchange. This index represented approximately 78% of the total market capitalisation of the exchange as of April 2010, making it one of the most representative of all the global indices.
Tradable via futures and SB instruments such as CMC’s Aussie 200 contract.
For more info’: ASX

The NZSX 50
I had to give it a mention, despite being the minnow of all of them!
Comprised of the top 50 companies as listed on the NZ Exchange by free-float market capitalisation. The NZX50 took over from the NZSE40 in March 2003, and is unique in the respect that it takes into account dividends payable by the constituent companies. This is due to the fact that dividends payable are somewhat higher than is the norm in other markets. This index is dominated by one or two heavyweights, most notably Telecom New Zealand.

Not easily tradable, unless you’re interested in CMC’s contrived instrument which reflects the top 10 companies!
For more info’: NYZ

The American Exchange

Australian Stock Exchange

European name for Exchange

Chicago Board of Options Exchange

Chicago Board of Trade

Chicago Mercantile Exchange

London International Financial Futures and Options Exchange

London Metal Exchange

London Stock Exchange

National Association of Securities Dealers Automated Quotation system

New York Stock Exchange

New Zealand Stock Exchange

Straits Times Index

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Symbol Bid Ask Spread
EURUSD 1.22950 1.22970 2
GBPUSD 1.39690 1.39720 3
USDCAD 1.26430 1.26460 3
USDJPY 106.850 106.870 2
USDCHF 0.93590 0.93620 3
AUDUSD 0.78360 0.78390 3
NZDUSD 0.72910 0.72960 5
EURGBP 0.88000 0.88030 3
EURCHF 1.15090 1.15120 3
EURJPY 131.380 131.410 3
AUDJPY 83.730 83.780 5
GBPJPY 149.260 149.320 6
XAUUSD 1328.76 1329.16 40
XAGUSD 16.516 16.566 5