UNDERSTANDING AN INDEX’S COMPONENT STOCKS
Popular Financial Indices
Understanding the stocks that make up an index can be an effective way of analysing an index. Different indices can have a particular focus on certain types of stocks or market sectors. For example, the NASDAQ index mostly consists of technology stocks and so can generally be seen as a measure of the performance of the technology industry (although the NASDAQ also lists various stocks from other industries, for example, the finance, insurance and transportation industries).
Monitoring indexes and noting their movements over time can help inform traders about investors’ attitudes towards a range of companies and market sectors.
Some widely traded indices include:
- – The S&P 500 and Dow Jones (New York City)
- – The FTSE100 (London)
- – The DAX30 (Frankfurt)
- – The Hang Seng (Hong Kong)
- – The Nikkei 225 (Tokyo)
- – The Shanghai Composite
Many multinational corporations have their stocks listed on an index other than their domestic exchange. This is referred to as cross-listing.This means that when a firm’s domestic index is closed, its stocks may be tradable on an international index that is open. Cross-listing can increase the liquidity of a company’s stocks, as it enables traders to choose from a range of markets from which to trade a particular share. For example, Alibaba.com is listed on Hong Kong’s Hang Seng index as well as the New York Stock Exchange.
ROLLING DAILY AND FUTURES
Financial indices can be traded in ‘rolling daily’ format or as ‘futures’. Rolling daily trading is a trading format in which trades are “rolled over” from one day to the next. A trade of this kind will stay open until the trader decides to close their position, or when their stop-loss order or stop-limit order is reached. It is important for new traders to note that rolling daily contracts apply charges to a trade for each night the trade is held open.
Trading in futures format means that traders are given or can choose a fixed expiry date and time at which their position on a security will automatically close. In contrast to rolling daily contracts, futures trading does not attract overnight fees.