What are stock market indices?

Stock exchange indices refer to a specific, precisely defined stock exchange segment. Depending on the segment, the stock market index may be a sector index, a commodity index or a bond index. However, the best-known stock market indices are the stock market indices.

Stock indices bundle shares of different companies according to specific criteria. This makes it easier to look at trends on the overall market based on the index level. Stock indices are therefore often seen as a barometer of market sentiment.

In stock indices, a primary distinction is made between a price index and a performance index. In the case of a price index, the index level represents the average price of the shares it contains. The index is not adjusted for dividend payments so that it also reflects the usual price discounts for dividend payments. Worldwide important and well-known indices that fall into the “price index” category are, for example, the Dow Jones (USA), the Nikkei 225 (Japan) or the CAC 40 (Canada). With a performance index, on the other hand, the distributed dividends are added directly back to the index level so that no price loss occurs. The best-known performance index is the German DAX.

The price of an index is normally calculated based on the price of the shares it contains. The prices of the stocks included in the index are weighted according to various criteria defined for the index, and an average value is formed from them, which then reflects the index level. Indices and their levels are often calculated retrospectively for the period before their actual introduction. When they are launched, indices are also assigned a fixed underlying value, which is used to calculate the performance and index levels in the years before and after the launch.

Each country has a large number of its own indices, one of which is usually the leading index. The most important US indices include the Dow Jones Industrial Average, Standard & Poor‘s 500 and Nasdaq Composite. The most important Asian indices are Nikkei 225, Hang Seng, Shanghai Composite and KOSPI. The most important German indexes are the DAX, MDAX, SDAX and TecDAX. 

is it possible to use contract for difference (CFD) to trade indices?

Definitely, many brokers allow you to use CFD to forecast if an indices will perform well or not. Some of the trusted brokers you could use to trade  indices are Pepperstone, Easy Markets and as you can read from our review IC Markets

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