Stocks Index trading: why is it beneficial to trade indices?

Stocks Indexes cannot be manipulated

I ask me why there are few traders who trade stocks indices like SP500, Nasdaq, Ftse100, DAX and Russel.

For me Stocks Indices are the least manipulable financial instruments. Forex does not have any official and regulated quotation, with brokers all offering their price. Cryptocurrencies have such low volumes that a few million euros (whales) are enough to make good and bad times.

Conversely, it is not possible to manipulate an index as you are not actually buying it. You can invest as much as you like in an index, even € 100 million at one time. You will only make it move a few points; the algorithms will detect the inconsistency and rush to get it back to the normal price. They will seize the opportunity and make you lose a lot of money.

What causes the price of an index to modify?

As you can say, a Stock Index is a value of 30, 40, 100, 500, 2000 companies quoted. An avarage of that value.

It is not you who change the index, but the prices of the shares that make it up.  costs would be infinitely higher than the hoped-for benefits. It would be necessary to buy or sell tens of thousands of shares at the same time on hundreds of thousands of listed companies.

You would never spend 100 million euros to vary an index by 20 points, knowing that with the same sum you would be the undisputed rulers of the Bitcoin market or of a specific action. It is also the end of the urban legend according to which prices are manipulated to cause a stop to be executed (the paranoid excuse of the bad trader who is looking for an excuse not to admit that he cannot trade). Spend € 50 million to look for a stop on a € 1 micro lot. Of course, it doesn’t make an eyelid! The main strength of indices is that no one has the financial capacity to manipulate them. Furthermore, the price of the indices is worldwide, it is the same for every trader.

Money management is integrated into indices trading

We can say that, with an index, money management is already integrated, as it is simply a basket of stocks. And you know that you should never put all your eggs in one basket. If you buy the Nasdaq 100, you diversify by investing in one hundred American technology companies. By purchasing the CAC 40 index, you are betting more decisively on the petrochemical industries.

With the FTSE100, you bet on financial companies instead. When trading the Dax, the weight of the industrial sector is higher than many other indices. Each index has distinctive features that are not always evident. You need to know them.

When you trade futures you need a bank account and a lot of margin. But today you can use CFDs that offer a more confortable margin requirement to trade.

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By trading the indices you reduce the risks

Risk is the trader’s number one enemy. If you want to have even one chance of success, you have to put it in your head. The risk must be avoided. It may fit you once, twice, maybe three, but on the fourth you will go down and you won’t get up. Along with yourself, risk is your number one enemy in trading.

Trading a share is risky, since the CEO could make a wrong decision or the company may be sued … It happens every day that shares gain or lose 10 or 25%. An aspect that excites beginners on the stock market, as they imagine they can earn 25%. But they can also end up with 25% less and take years to recover, especially if they have limited capital.

On the other hand, an index that gains or loses 10% is a historical event. It is still talked about after 20 years.

Trading an index avoids the risk of bankruptcy

Furthermore, unlike a company, an index cannot fail; you will therefore not lose your entire investment. If a Dax 30 company goes bankrupt, it is automatically replaced by the 31st German company. The weight of this failure in the index will therefore be extremely low. If, on the other hand, you hold the stock of that company, you will have lost everything.

The indices exploit the global economic situation

Since you don’t put all your eggs in one basket, which you do if you buy a cryptocurrency, a stock or trade on Forex, you take advantage of the dynamism of the global economy as you invest in 30, 50, 100 companies. If one of these companies is in trouble, this will not prevent the index from rising.

You also expose yourself to less risk with indices. Benefit from the positive or negative dynamics of the world economy, based on whether you buy or sell the index. With a little experience, you can identify the medium or long-term trend of the indices. Therefore, if you have not opted for an aggressive short-term strategy, you can easily get carried away by the current.

Each index has its own personality

This is one of my favorite features. Indexes all have their own character. In fact, all indices have a personality, a nervousness that adapts to scalping, day trading or swing trading. They are just like men, they have their own distinctive traits and character. And you will surely find an index that matches your personality as a trader.

Trading indices maybe is more ethical to trade stocks

As surprising as it may be, trading indices is ethical. You can explain it to your friends who judge traders without having the slightest idea what the economy is. By buying or selling indices, you do not affect the share price in any way. Therefore, do not affect the lives of employees and the other aspects that the media do nothing but talk about. You have no impact on countries’ debt, commodities, etc. You simply buy or sell an index. Investing directly in an index does not cause share prices to vary. You have an absolutely neutral ecological footprint.

On the contrary, if your friends are holders of life insurance, they have an impact on economic life and people. For example, they speculate on the debt of countries. In general, they will not be happy to hear these explanations, but you will have to help them get out of their economic obscurantism.

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