Are market indices confusing to you?

Stock market indices may be confusing to you if you are just starting out as a trader. That doesn't mean only novices are confused. With all the information contained in the indexes and the different types, even some long-time traders find it remains confusing to varying degrees. How would you like to stop at least most of the confusion so you can develop stronger, more profitable trading strategies?

IndicesAs a newbie in the world of trading, indexes as a whole may not make a lot of sense to you, so that is the first question to answer. What is an index and what does it tell you?

Types of indices

What may be more confusing than anything else are the different indexes. Do you wonder what they are and why there are so many? You are far from alone. The good news is that they are easy to explain and once explained, make more sense. Some indexes are worldwide, such as S&P 100 and MSCI World. These will list companies anywhere in the world that offer stocks to shareholders. Next are national indexes. These are the indexes quoted the most often and include S&P 500 and the Dow Jones Industrial Average for the US, Nikkei 225 for Japan and FTSE 100 for Britain.

You will also find indexes by region, such as FTSE Developed Europe Index. Some are exchange based, such as NASDAQ-100 and NYSE US 100. Some are groups of exchanges. Euronext 100 and OMX Nordic 40 are examples of such group exchanges.

Indices also have different versions of types as well. As you learn more about index trading, they can become quite useful. Weighted indexes may include price-weighted and capitalization-weighted. An area of index trading that is growing are stocks that comply with certain ethical standards, such as environmentally sustainable. These have their own indexes.

If you are just starting out in index trader/investor, two indexes provide a good way to get your feet wet, so to speak. These indexes are Mutual Funds and Exchange Traded Funds or ETFs as they are called. Mutual funds are basically a group of stocks selected for a particular type of investment, such as slow growth (safer, low-risk stocks) and fast growth ( higher yield, higher risk stocks). ETFs are similar to Mutual funds, but you can sell, buy or even go short with ETFs. You can't do this with Mutual funds.

With a basic understanding of market indices, it will be easier for you to learn even more about particular indexes or aspects of indexes as you develop your trading/investment strategies. The more you learn about indexes, the more you realize they are tools for reading market price action. 


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