Business of Men

Trading stocks daily: Get better by understanding indices

on

Stock trading, like many other high-earning professions, has traditionally been reserved for men. That’s not to say that women couldn’t get into trading, but you definitely do better at trading stocks daily when you understand how stock market indices are calculated, and what causes their price to move.

While some investors are only interested in individual companies within the stock market, there is plenty of worth in acknowledging the market as a whole – or, at least, some of the indices that serve it.

Several stock market indices are used, although there are three that stand out in terms of their popularity – the S&P 500, the Dow Jones, and the Nasdaq. And entrepreneurs are coming to appreciate how they can use these indices when trading stocks daily as a secondary income stream.

These are essentially clusters of companies that have their unique parameters. The S&P 500, for instance, catalogs 500 of the biggest firms in the United States based upon their market capitalization, ‘visibility,’ and trading history. The Nasdaq, meanwhile, primarily focuses on tech companies.

Each index has a value of its own, based upon the performance of the individual stocks that it contains. However, how the value of an index is calculated tends to vary, and there are four general techniques:

Market-Weighted

Here, each individual stock within the index will add its own value based upon its market capitalization. Therefore, the largest market cap firm will lead to the most movement within the index’s price.

The S&P 500 is one of the most popular market-weighted indices, and it is calculated by working out the market weighting of each stock. This calculation takes the number of shares each company has and multiplies it by a single share’s current value.

So, Apple’s current weighting is 16.79 billion total shares multiplied by $134.43, while Facebook’s calculation is 2.4 billion multiplied by $309.76.

This ‘free float’ market cap is then divided by the total market cap of the index to give each stock its individual weighting. So those with a larger market weight will have more of an impact on the value of an index on a day-to-day basis.

Price-Weighted

This is a more straightforward calculation in which the weighting for each stock is derived from its price.

In this scenario, smaller companies with a lower market cap – and yet a greater stock value – can have more of an impact on the performance of the overall index.

The Dow Jones is calculated in this way, and some investors believe this is the most effective method for analyzing the strength of an index and its major players.

Equal-Weighted

As the name suggests, here each stock is given an equal weighting within the index regardless of its financial scale.

So, the value of each stock is added together and then divided by the total number of stocks within the index.

This is a simplified approach to calculating index value, and while useful for newcomers to investing, it is perhaps not as ‘sharp’ a measure as the market or price weighting techniques.

Fundamental-Weighted

Investors that take a more technically-minded approach to their trading may use a fundamental-weighted method to calculate an index’s performance.

This technique looks at advanced measures such as price to earnings ratios and book values to calculate the index value, and clearly this is aimed at the most experienced of investors.

Stock market indices are a popular option for many traders, and that’s why a number of brokers offer their clients the chance to invest in an index or two – for example, you can read True Potential reviews to see what this broker offers as far as indices are concerned.

Highly liquid and yet volatile on a short and long-term basis, stock index trading can be a useful source of primary or secondary income as long as you know what causes their value to fluctuate.

What causes stock index price moves?

All stock market indices, whether they have 30 individual elements or 500, will ultimately perform as well as their constituent parts.

But you can see how the weighting calculation can have an impact upon the index’s value, and if a disastrous event affects a major brand – think BP in the midst of an oil crisis – then their value, and thus their index’s, will suffer accordingly.

When analyzing an index for trading stocks daily, always consider how powerful its constituent parts are, and whether those stocks are set for a period of growth or negativity.

Sometimes, price moves occur independent of the stocks within the index. Economic and political factors are always amongst the most considerable, whether its unemployment figures, inflation, trade deals or a change in government.

Taken together, we can see how easy it might be for an index’s value to be moved, and how investors can benefit accordingly when trading stocks daily as an income stream.

 

About Business Woman Media

Our women don’t want to settle for anything but the best. They understand that success is a journey involving personal growth, savvy optimism and the tenacity to be the best. We believe in pragmatism, having fun, hard-work and sharing inspiration. LinkedIn

Recommended for you