You may have heard people talking about the stock market and indices, or someone mention that the market is “performing well”, at the moment. If you are new to trading or have never traded before, you might wonder what these terms mean. And if you’ve heard of the potential profit that can be made, you might be wondering how to trade stock indices yourself. Let’s dive into it and look at what you need to know to start trading indices with CFI
What is the Stock Market and Indices?
Before you consider how to trade stock indices, you need to know what the stock market is, and how you can measure its performance to determine the best time to buy or sell. The stock market is a marketplace where investors buy and sell shares. Shares, stocks or equities are assets that transfer fractional ownership of a company to an investor. The stock market provides a platform where the company can issue shares to the public for investors to buy and sell the shares. The stock market is essential to economic development, because it is a way for companies to access capital easily from the public, while allowing investors to make profits in the form of dividends.A stock market index
, also known as a stock index, is a way of measuring the performance of the stock market or a section of it. It helps investors to gauge the overall performance of the market by comparing past stock prices with current price levels. For example, a national index shows the performance of a nation's stock market, and it reflects the investors’ sentiment on that country’s economy. To measure market movement, investors follow different market indexes such as Nasdaq Composite, Dow Jones, and S&P 500.
Stock Exchanges Around the World
Different countries have different stock exchanges, and a new trader needs to understand them so that they can determine how to trade stock indices in those stock markets. Today, it is estimated that over 630,000 companies are traded publicly in the world. Let’s look at the names of some of the largest stock exchanges from different countries by market capitalization.
1.New York Stock Exchange (NYSE): The NYSE is the largest stock exchange in the world, with over 2,400 listed companies. It represents nearly 40% of the world’s total stock market value, and by 2018 it had a market capitalization of $23.23 trillion.
2.Tokyo Stock Exchange (TSE): The TSE is the largest stock exchange in Japan, and has over 3,575 listed companies. It has a market capitalization of $6.22 trillion.
3.Shanghai Stock Exchange: (SSE): The SSE is the fourth largest in the world, and the largest in the People's Republic of China, with a market capitalization of $5.01 trillion.
4.London Stock Exchange (LSE): LSE is the largest stock exchange in Europe, and the sixth-largest in the world, with over 3,000 listed companies, and a market capitalization of $4.38 trillion.
5.Toronto Stock Exchange (TSX): TSX is the largest stock exchange in Canada. It has over 1,500 listed companies, with a market capitalization of around $2.29 trillion.
Why Do Companies Offer Shares?
To understand how to trade stock indices with CFI, you need to understand why companies offer shares. Shares are stakes of ownership in a public company. A company divides itself into small stakes and offers those stakes for the public to buy so that it can raise money to run its operations, grow, and develop the business. Let's say that a company divides itself into 50 million small pieces – or “shares” – and offers those shares to the public to buy at $10 each through an initial public offering (IPO). When investors buy the shares, the company earns money – it will be able to raise a total of 50 million x $10, which is $500 million. In return, the investors receive a proportion of the company profit, based on how many shares they bought. This is called receiving dividends.Investors can buy either ordinary shares or preference shares. Holders of preference shares have priority over ordinary shareholders in terms of decision making such as the closing a company or payment of dividends. They are entitled to a fixed periodic income and have restricted voting rights depending on the terms of the shares they hold. Ordinary shareholders reserve voting rights at the company's general and official meetings, and are entitled to dividends or distribution of assets when the company is dissolved.
Why Do Share Prices Move?
Stock prices move in response to market forces. The most powerful market force is the law of supply and demand. Knowing how it affects the stock market can help you understand how to trade stocks. If the demand for a particular stock is high, it means that many people want to buy it, and its share price will go up. On the other hand, if more people want to sell a stock, and there are few people interested in buying it, the stock price will fall.The law of supply and demand is that simple – what is hard to grasp is what makes people want to buy one stock more than another. That boils down to which company’s news is positive or negative, the companies’ earnings, and investors' sentiment.
Company earnings are an important factor that investors use to make investment decisions. If the company is profitable and it makes good money, many people will be willing to invest in its shares, meaning the share prices will go up. If a company never makes money, and it is wallowing in losses, people will shy away from buying its shares for fear of losing their money, making the share price go down.
Another important factor that makes share prices move is the investors’ sentiment. Investor sentiment is how investors feel about the prospects of a company, and the potential they see in it. Even if a company is not profitable now, but investors feel that it has promising prospects and the potential for growth, many people will flock to buy its shares, making the share price go up. A good example of this is the internet sector, where companies raised billions of dollars in market capitalization, without making a single cent in profits, simply because investors felt that the companies had potential, and that their prospects for the future were promising.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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