An index is a statistical average of the value of a certain group of securities. Indices are used to gain a general view of the performance of a sector. For instance, a mining index tracks the value of a collection of mining stocks. It is also a synthetic instrument in its own right that can be traded without being exposed to the underlying assets. Investors wanting to gain exposure to precious metals without actually purchasing the underlying can invest in a mining index so as to spread their risk over the entire sector. The S&P 500 is by far the best known and most traded stock market index. It comprises the 500 largest publicly traded companies in the US, weighted by market capitalization. Indices are also used as a benchmark against which trading or investing performance can be compared. For instance, a fund manager may compare the performance of his or her own fund against the performance of the S&P 500. If the S&P 500 gained in value by 20% over the course of the year, a great way for a fund manager to show that they are beating the market with their own investments, is to be able to show that their fund outperformed the S&P 500 by generating more than 20% returns for its investors.
Indices in forex, just like stock indices, are simply instruments created to track the value of a collection of assets. They are statistical averages taken by combining the relative worth of a collection of currencies rather than just individual currency pairs. For instance, the US dollar index (USDX, DXY, DX) was created to track the value of the US dollar against a basket of currencies that include the main trading partners of the United States. When charting the US dollar index you are looking at the generalized performance of the US dollar, not just against the Euro, for example, but against a collection of the currencies of the closest trading partners of the United States.
Stock market indices are synthetic instruments that track the value of a collection of stocks. For instance, the value of the S&P 500 index is determined by the performance of the 500 largest publicly traded companies in the US. The Dow Jones Industrial Average is similar to this, tracking the value of 30 large publicly traded companies in the United States. Indices are also useful for tracking the performance of specific sectors of a country’s economy. For instance, the Nasdaq-100 excludes financial companies and focuses on tracking the value of 100 of the largest companies involved in industry, technology, retail and telecommunication, among others.
There is no such thing as a best or worst stock index. Indices are merely information. They offer a statistical average of the values of a given collection of underlying stocks, such as those belonging to the tech sector, or to financial companies or heavy industry. For this reason we can talk about which index performed best or worst relative to other indices, but not which index is the best or worst. They are merely different tools for different ends.
The most popular index is undoubtedly the Standard & Poor’s 500 (S&P500), which is a measure of the performance of the 500 largest publicly traded companies in the United States. The reason for its enormous popularity is that the S&P 500 has become synonymous with the performance of America’s economy as a whole. It is also used by investors as a benchmark against which they can compare their own returns. To consistently beat the performance of the S&P 500 is the holy grail of performance metrics as it means that you are outperforming the growth of the biggest US companies.
The main US stock market indices are the S&P 500, Dow Jones Industrial Average and Nasdaq 100. The main European indices include the EURO STOXX 50, the UK’s FTSE 100, France’s CAC 40 and Germany’s DAX. Then, in the Asian region we have the Hang Seng Index from Hong Kong and the S&P/ASX 200 from Australia. All of these indices track stocks that are traded on their own national exchanges.
Almost anything with a price feed can be traded. Each index employs a different weighting methodology to combine the different prices of all the assets that compose it into a single value. It is this value that is tradable when you go through a broker such as EverFX. To trade an index is simply to speculate on whether the index in question will either rise or fall in the future and to take a position accordingly. The way the index moves is determined by the actual performance of all of the 500 companies that compose it but you can trade the index itself without having to be exposed to any of the individual stocks that make it up.