Trading Equity Indices with Genetrade
Equity indices are stock market indices that are used to measure the health and value of specific segments of the stock market or the overall economy of a nation. They can be based on specific industries (for example, the NASDAQ Composite measures the overall performance of the most highly-valued IT companies in the United States) or on specific corporations that make the most impressive impact on the overall economy of a country (for example, the American S&P 500 is based on the largest 500 companies trading on the New York Stock Exchange).
There are a large number of equity indices that you’ll want to be at least vaguely familiar with to be an effective trader with Genetrade. The following are six of the world’s most important stock indices and what they monitor.
As you can see, every major country has at least one stock index intended to track the performance of the major corporations that trade on their exchange. This means that investors can place their money into the stock market of a particular nation if they believe that an economy will perform especially well in the coming years by purchasing mutual or exchange traded funds that track the indices of the nation in question. Because the United States has the top two most important stock exchanges in the world (the New York Stock Exchange and the NASDAQ), the United States also has many more indices devoted to tracking the performance of subsets of the market.
Many beginning traders make the mistake of believing that the calculation of an index is calculated simply by adding the value of each stock on the index and dividing by the total number of stocks on the equity index (for example, 500 for the S&P 500). However, the true calculation process is much more complicated thanks to the fact that each index encompasses corporations that vary wildly in value when compared to one another. It is simply not accurate to weight each corporation’s stock as contributing equally to the overall health of the index when the value of each corporation is not the same.
Accordingly, moves on the stock market will disproportionately affect the performance of the index overall in accordance with the size of the corporation and the direction of their stock. For example, if a very highly valued corporation is involved in a public scandal and sees the value of their stock crash, the entire index will likely go down in value, regardless of if many minor players are seeing the value of their stocks increase. Similarly, highly valued stock can also carry an index, even when smaller corporations are suffering. It’s important to remember that the equity indices are intended to track the performance of the market as an entire entity; they are not indicative averages of the individual corporations.
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