In this guide, we look at the best indices for trading & investing. We explain what they are, the risks involved and also how you can potentially profit from stock market indices. Plus, what are the best indices to trade for beginners and experienced investors.
What is a stock market index?
A stock market index is a index that follows a section of the stock market. These indices derive their values primarily from a group of stock prices. Investors often use these indices to describe, measure and compare the aggregate performances of a group of selected stocks.
What is index investing?
Investing in indices, is where you buy an index tracker that mimics the price of an index. Fo example, the Vanguard VUSA tracks the price of the S&P 500. Whether you like it or not everyone speculates on indices. Long-term investments like pensions buy them, or short-term traders use financial spread betting or CFDs to speculate on them going up or down in the short term.
Major indices for index trading
Below are some of the most popular stock indices for trading around the world.
Best indices for trading & investing
The rest of this guide helps you to understand these indices, what they are and how to trade them.
S&P 500 (US)
S&P 500 – Top of our list of the best indices for trading is the US Standard & Poor’s 500 Index (known as S&P 500, factsheet). The index is based on the market cap of the largest 500 companies listed on the NYSE or the NASDAQ. Because of its diversity, this index is one of the most traded stock indices. Its day-to-day movements are widely followed. Investors reckon that S&P 500 is one of the best indicators for the US economy. As such, S&P 500 can set the trend for many other indices around the world.
Nasdaq – Nasdaq is a growth-oriented stock market. It lists many younger companies which grew to become tech behemoths – such as Facebook (now Meta), Amazon (AMZN) and Google (GOOG). There are two popular indices created out of Nasdaq stocks: Nasdaq Composite and Nasdaq 100. The latter is slightly more volatile as it has less components. But volatility is often seen as a positive thing because it presents more opportunities for traders.
You can also invest and trade the Nasdaq 100 Index, through an exchange-traded fund called QQQ (cube). This ETF can be more popular than the underlying index at times.
Dow Jones Industrial (US)Dow Jones Industrial – The Dow is one of the oldest indices around (since 1896). There are 30 constituents, primarily made up of industrial companies – which used to be a major portion of the US economy. The Dow was the key barometer of the US stock market in the first half of the 20th century. Its importance was overtaken by the S&P 500 after WW2 due to the narrowness of its components (only 30 stocks). But it is still an important index to follow because of its history. Many use Dow to reference the performance of the US stock market over a century.
FTSE 100 (UK)UK FTSE 100 (Financial Times Stock Exchange 100 Index) – The FTSE covers the top 100 companies in the LSE (often abbreviated FTSE 100) and is generally regarded as the benchmark for the UK economy due to its representativeness and liquidity. It’s an excellent blue-chip index for jobbing in and out of all day. Because of copyright, some brokers call it the UK 100 or the UKX. Footsie is mainly traded via spread betting, CFDs and MT4 with brokers. This UK index is market cap weighted and is composed of many large established names like Unilever (ULVR), BP (BP) and HSBC (HSBA).
German DAX – The DAX consists of the largest 40 listed companies on the German Frankfurt exchange. The index is one of the most popular stock indices to trade – due to its good daily volatility and liquidity. Trading via spread betting and CFDs on MT4 is more popular now as the contract size on the futures contract is quite large. The margin for a full-size DAX contract is about EUR13,000 and the tick size is EUR25 per point. Using MT4, CFDs or spread betting means you can trade in a smaller size (such as mini Dax future). It is also the first market to open in Europe which makes it a good indicator for the FTSE, and follows on from the US indices.
CAC 40 (France)
France CAC – The CAC (Cotation Assistée en Continu) 40 Index is a benchmark index of the French stock market. It has about 40 components, with famous names like LVMH (GMG News) and AXA. The international nature of its component stocks means that a lot of the index earnings are from outside France, hence its popularity with international investors. As an aside, Forbes calculated that LVMH’s owner Bernard Arnault is the second richest man in the world with a net worth exceeding $100 billion.
Nikkei 225 (Japan)
Japan Nikkei 225 – One of the most active stock markets there is found in Japan. The most famous Japanese stock market index is known as the ‘Nikkei’. This index is made up of the top 225 stocks (by market cap) listed on the Tokyo Stock Exchange. The index originated after WW2 and has a eventful trading history throughout Japan’s boom-bust cycle. It peaked in 1989 at 38,000 and traded as low as 7,000 in 2009. According to NKY’s factsheet, the two biggest constituents are Fast Retailing (9983), owner of Uniqlo, and SoftBank (9984), owner of ARM Holdings.
Hang Seng (Hong Kong)
Hong Kong (Hang Seng) – Outside Japan, perhaps the most well-known stock index is Hong Kong’s Hang Seng Index (HSI). The index has about 80 components (factsheet), with a large number of china-related firms such as ICBC and BOC. The index was extremely volatile in its earlier years. These days, the market still experienced bouts of manic buying (2007) and panic selloffs. A lot of investors like to invest in this index as a proxy for the Chinese economy.
Most profitable indices 2023
The most profitable indices for investors in 2023 so far is the NASDAQ 100, primarily due to the growth of the tech stocks listed on its exchange.
Here are the best performing indices of 2023 so far:
|Japan Nikkei 225 Index||NKY||28.50%|
|Italy FTSE MIB Index||FTSEMIB||21.90%|
|Spain IBEX 35 Index||IBEX||16.00%|
|S&P 500 Index||SPX||15.60%|
|Germany DAX Index||DAX||14.10%|
|France CAC40 Index||CAC||14.00%|
|Euro Stoxx 50||SX5E||13.20%|
|India BSE Sensex Index||SENSEX||11.50%|
|Brazil Bovespa Index||IBOV||7.90%|
|Sweden OMX Index||OMX||7.40%|
|Canada TSX Composite||SPTSX||6.40%|
|Switzerland SMI Index||SMI||4.40%|
|Australia ASX200 Index||AS51||2.70%|
|Shanghai Composite Index||SHCOMP||1.10%|
|HK Hang Seng Index||HSI||-9.10%|
|CBOE Volatility Index (VIX)||VIX||-36.50%|
What moves index prices?
Knowing these indices is only the first step towards profitable trading. Calculations aside, the most important things to know about these stock indices are
- Index Constituents. What companies are the largest? What sectors are they in? The general rule of thumb is this: The bigger the company, the more influence it will have on the index, especially if the index has less than 50 components.
- Index Data. Company earnings, dividends, and floats. How much are the index components earning? And the valuation of the market? A highly-valued stock market may have trading dynamics different to that of a lowly-valued one.
- Index historical movements. Known what had happened in the past. In Japan, for example, earthquakes (’95) and tsunamis can have large – but temporarily – impact on the stock market. In the US, prices can collapse 20% in a day (’87). These are unpredictable factors. In Hong Kong, sometimes policy in China have huge impact on its markets.
- Macro Factors – such as tariffs, interest rates, unemployment, inflation can all impact the stock markets one way or another.
Index trading tips
Stock market indices can be a great place to learn how to trade. Many professionals just day trade equity indices; some take longer-term positional trades. You can learn to do this too. Here are seven tips to get started on trading indices:
- Select equity indices are are relatively liquid. This give you tighter spreads. Look at home markets first, then US and other key indices.
- Stay ahead – by doing your homework. Before trading the index, find out all you can about the market, such as earnings calendar and economic releases. Keep an eye on key data like GDP or unemployment/inflation.
- Focus on a few indices – at the beginning before branching out. Know the index inside out. Start with one direction first (long). Only start shorting when you’re more experience. This is because the market becomes more unruly on the downside.
- Choose appropriate trading instruments – to make your bets. Generally for indices, you can choose futures, spot, or ETFs – depending on your appetite for leverage. To start off, use lower leverage to prolong your trading life. Do not overtrade or overleverage.
- Study past patterns. Be prepared for a repeat of historical patterns. Know where the market is in terms of bull or bear trends.
- Create viable trading strategies from your market insights and follow them. Have a list of low-risk ideas.
- Open accounts with reputable brokers. This will help you to navigate the market easier. Generally, the best indices brokers will be the ones that offer the tightest spreads. You need tight spreads with index spread betting as traders like to take quick profits on short-term intra-day positions. Good charts, a clean interface, and reasonable transaction costs all help to improve the trading process.
How do you trade indices?
If you want to speculate on indices, here are the most popular ways:
- Spread betting: place bets on a £ per point basis as to whether you think the price will move up or down. There is no capital gains tax on profits as trades are structured as bets. Compare spread betting brokers here.
- CFDs (Contracts for Difference): you speculate on the opening and closing price of your chosen index. Compare CFD Brokers here
Want more info? There is even more information in our how to trade indices guide.
How do you invest in indices?
You can either invest in indices through ETFs, index funds, robo-advisors or buying individual shares
- ETFs (Exchange Traded Funds): you can buy shares traded on the stock market that mirror the movement of an index. Compare stock brokers here.
- Index Funds are funds that either actively or passively track the performance of an underslying index – read our guide to index funds
- Robo-advisors simplify investing and break down markets into sectors, many of which are based on indices – read our guide to robo-advisors
- Buying shares that constitute an index will give you more flexibility if you want to exclude certain companies such as non-ESH firms.