Indices Definition – What are Indices? | CFI LB

indices

The term “indices” is the plural of the word “index”, and in trading terms, an index is a way of tracking the performance of a group of [assets] by a standardized method.

 

Indices usually track and measure a basket of stocks and can either be a broad mix to capture the whole market or more specialized to track a specific market industry or segment.

 

Examples such as the S&P 500, FTSE 100, or DAX 30 track a broad selection of stocks traded on specific [stock exchanges]. Whereas, indices such as the Philadelphia Gold & Silver Index, Nasdaq biotechnology index, and PSE mining & oil index, as their names suggest, follow and track baskets of stocks from specific industry sectors (or countries) and allow investors to be more selective in their investment strategy.

 

Indices are often used by investors as a benchmark to measure the performance of investment portfolios and often the returns from a portfolio will be measured against, as an example, the FTSE 100’s performance (return) over a specific time period.

 

Each global index has its specific method of calculating the hypothetical value, and this will be based on the weight that each stock, or bond, has in the index; and the relative price movements of each.

 

Investors cannot invest directly into an index and therefore various funds have been created that try to mimic the performance of these indices for investors, while traders can bet on fluctuations in the hypothetical value using instruments such as [CFDs], [ETFs], and [Futures].

 

Key takeaways:

 

  • Indices are a way of tracking a basket of stocks, bonds, or various other financial instruments
  • There are thousands of indices listed around globally
  • Investors may use indices to measure the performance of investment portfolios against
  • Indices may track a wide range of stocks or be more market/sector-specific and track a select number of stocks in a specific industry sector
  • Trades cannot trade indices directly, but can bet on price fluctuations using CFDs, ETFs, and Futures
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