Indices: An Overview
Indices refer to the total performance of a group of stocks and how well they fare in the market. The best benefit of trading indices is the exposure that individuals get to a sector or an economy at once. So when someone in Australia googles “how do you trade indices“, they’re referring to the process of buying the futures or marking contracts to the total market performance of the companies or sectors. An example of a market index would be the S&P/ASX100 that tracks the top 100 of Australia’s mid-cap and large equities and their performance.
Indices Trading And Their Benefits:
- Enjoy Lower Costs: Compared to other investment funds and stock trading agencies, indices offer lower costs for their proceedings and transactions. Fees for management, taxes and other costs are significantly less and they are more or less dependent on the value of the total holdings. Since less work is required to manage the index funds as all they do is track market performance, the management fees are also minor. Turnover ratios are also less compared to some of the most actively managed funds and the taxes incurred are also small for any capital gains or profits. Probably one of the reasons why index trading seems very attractive to newbie traders.
- A Great Way To Diversity The Portfolio: Indices offer investors and traders a great way to diversify the entire portfolio by investing in a single index fund. Since the fund tracks the market performance of Australian companies, the total fluctuation is minimal, reducing the chances of traders losing their money. It also ensures that the value of the portfolio isn’t just tied to a single company. Unless there’s a market crash or a great recession, there’s no need to fret. Since the index isn’t based on a single company, the total risk involved is also minimal and traders don’t have to worry about any significant losses over time. Those looking to save up on retirement can trade indices to generate profits over time.
- Better Returns: Although individual companies can lose stock value or gain them in a few years, the total index value pretty much keeps growing. Although this might take a considerable amount of time, several years for some, there can be no doubt that they give great value for any investor at less cost.
How To Trade Indices In Australia:
To answer the question “how do you trade indices”, newbie traders must keep these things in mind first:
- Keep track of the index prices through economic articles and news, financial results and performance statistics of companies, announcements and other changes in stock value or commodity prices.
- CFDs are the most common ways traders use to buy indices in Australia. They are contracts between traders and buyers where profits are made according to the difference in prices at the time of opening and closing. CFDs allow traders to opt for a short position or a long term position depending upon their stance. Those looking for short term gains favour cash indices and those that opt for long term investments go for index futures.
- Index funds can also be bought from brokerages or agencies that sell them. Passive management funds don’t offer that much risk for traders but they do offer lower returns. Actively managed funds on the other hand are riskier but the rewards and payout are higher too.
- Always keep a close eye on the market performance and keep monitoring the positions carefully. Moreover, don’t put all the money under a single index and be careful with the total monetary allocations.
