What are Indices?

Indices are financial instruments designed to track the overall price performance of a basket of stocks. An index uses a statistical measure of change that provides a snapshot of how that group of stocks is performing collectively.

Indices can be excellent for trading, as they offer exposure to broad market movements and built-in diversification to reduce the risks.

• What Are Indices
• How Are Indices Compiled?
• How Are Indices Calculated?
• Most Traded Indices
• What is Index Trading?
• What Moves Index Prices?
• Why Trade Indices?
• Why trade Indices with AvaTrade Australia?

What is ASX 200?

The Australian ASX 200 is a widely traded and popular index. It is designed to track the performance of 200 of the largest publicly listed companies in Australia If the price of the ASX 200 rises, the overall stock market is bullish (having an upward trend) wha falling price indicates that the market is generally bearish (experiencing a downward trend).

Indices act as benchmarks of stock market performance in different regions, sectors, or any relevant niche on their composition. They are loved by traders who want to simplify their trading by managing an overall position rather than many individual positions in the markets.

For example, if you are bullish (optimistic) about the Australian market, you can simply buy one of the major Australian indices, such as the ASX 200. In addition to simplicity, indices also have other benefits such as:

• Efficient diversification
• Broad market exposure
• Smooth price action
• High liquidity

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How Are Indices Compiled?

An index is defined the stocks it is composed of. Indices can be broad-based and contain a wide range of stocks in an industry, or they can be specific to a defined niche. The different types of indices include:

• Global Indices

Global stock market indices are composed of stocks from across the globe. An example is the Dow Jones Global Titans 50, which tracks 50 of the largest and most traded stocks on the American Stock Exchanges, which include the NYSE, and Nasdaq, as well as the Euronext, LSE, and Tokyo Stock Exchange.

• Regional Indices

Regional indices are composed of stocks from a specific region such as South America, Europe, or Asia. An example is the S&P Asia 50, which measures the performance of 50 stocks across 4 countries in Asia.

• National Indices

National indices are made up of stocks within a single country. An example is the ASX100, which covers the overall performance of 100 of the largest stocks listed in Australia.

• Sector Indices


These indices track the performance of selected stocks in a specific industry or sector. Some of the major sectors include: Energy, Technology, Financials, Industrials, Healthcare

Sectors can be as broad as healthcare or as niche as biotechnology. An example is the Global Cannabis Giants Index (BGCANG Index), which was developed to track the stock performance of the top 20 listed companies exposed to the cannabis industry.

Stock market indices are very popular, even though equities are not the only financial assets that can be indexed.

There are also indices available for assets such as: REITs (Real Estate Investment Trusts), Bonds, Commodities, Hedge Funds, And more…

The whole idea of indices is to provide a trader with exposure to certain broad or narrow segments of an economy or market.

How Are Indices Calculated?

Indices are calculated using different methodologies, but the most common approach is a weighted average of the constituent assets' prices or market capitalisations. The weighting refers to how much a specific stock contributes to the overall index. Each index has its rules for selecting the assets and calculating the overall value of the index.

Generally, indices are compiled in a manner that will provide liquidity, easy replicability, and the maximum desired exposure to the markets. There are always set criteria to determine stock inclusion or exclusion, as well as its weighting in an index. In most cases, there will also be periodic rebalances to ensure that an index stays true to its objectives. There may also be a special mathematical divisor or multiplier applied to ensure certain investing objectives of an index are realised.

The price of an index is dependent on its components. There are generally 2 methods of determining the stock weighting in indices:

1. Market Capitalization

A market capitalisation-weighted index is designed to give a higher weight to stocks that have larger market capitalisation. For instance, stock A with a market cap of $10 billion will have a bigger weighting in an index compared to stock B which has a market cap of $3 billion.

Most major indices are compiled using this measure. There may be some variations though, such as indices that consider all outstanding shares issued to the market (free-float market cap indices) as well as full-market indices that consider both active and inactive shares. Examples of capitalisation-weighted indices include the ASX 200, TSX Index, and CAC40.

2. Price

A price-weighted index is designed such that stocks with the highest prices have a bigger weight than stocks with lower prices, regardless of market capitalisation. A popular example of a price-weighted index is the DJIA (Dow Jones Industrial Average).

There are also other methods used to compile indices such as:

• Equal weighting - An equal-weighted index gives equal weights to all stock components. So, if an index has 10 components, then every stock has a weight of 10%.
• Fundamental weighting - a fundamentally weighted index gives higher weights to components that have better fundamentals. For instance, a stock may have a higher weighting in a fundamentally weighted index if it has better performance metrics such as price-to-earnings ratio, profit factor, and dividend payouts.

Most Traded Indices

What is Index Trading?

Index trading is simply the buying and selling of various indices. Traders speculate on whether an index will rise or fall and take a position. When buying an index, you are exposed to the overall performance of its components without actually buying the individual stocks.

Traditionally, indices have been described as passive investment vehicles and have been traded using various instruments such as Index Funds and ETFs.

• Index Funds - pooled investments that are designed to track the performance of a particular index. They have a fund manager whose sole responsibility is to ensure the index is tracked efficiently to match returns. Most index funds tend to have a higher minimum investment requirement, which includes management fees.
• ETFs (Electronically Traded Funds) - like Index Funds, ETFs are also pooled investments that track the performance of an index. However, ETFs are available through exchanges and can be traded just like stocks. In essence, you can simply buy one unit of an ETF and gain exposure to all its components. The biggest difference between ETFs and Index Funds is that ETFs can be bought and sold throughout the day (just like stocks), whereas Index Funds can only be traded using prices set at the end of a trading day.

Index CFDs

Indices are also available for trading as CFDs. CFDs (Contracts for Difference) are financial derivatives (products) that allow traders to speculate on the price of an underlying asset without taking any ownership.

A trader simply speculates on the price of the index by either buying or selling it as a CFD and can earn profits from both rising and falling prices. CFDs are also leveraged products meaning traders can significantly boost their exposure in the markets even with small capital amounts.

AvaTrade Australia offers a wide variety of Index CFDs covering many major countries, markets, and sectors. Some of the most popular Indices on AvaTrade include: SPI200 (ASX200), US500, US Tech 100, CAC 40, DAX 30, UK100, Nikkei 225, China A50, Cannabis Index, and many more

What Moves Index Prices?

Index prices are determined by the price changes of their components. This means there’s a strong correlation between the index’s performance and the prices of the highest-weighted stocks.  Some of the factors capable of moving index prices include:

• Overall Market Sentiment

The structure of indices allows them to serve as stock market benchmarks. Because they are composed of multiple stocks, they tend to reflect the overall sentiment in the market. So, for instance, if the market is generally bullish (optimistic), an underlying index will tend to see its prices rise.

Some of the factors that can influence market sentiment include: Economic factors such as wages and inflation, Company news reports, Central bank announcements and Interest rates

• Company News

News about a company’s significant weighting within an index can influence its overall price direction. Some of the most impactful company news include: Earnings reports, Profit forecasts and warnings, Mergers and acquisitions and Changes in management.

• Index Rebalancing

Most indices are rebalanced periodically. This rebalancing can see new companies included in the index while others are dropped. This rebalancing may also include an increase or decrease in the weightings of certain components within the index.

The period from pre-announcement to effective rebalancing date and post-rebalancing period can be very volatile for prices of indices depending on the expected events.

• Sector Performance

The performance of a sector can influence the overall performance of an index. For instance, Financials has a sector weight of about 28% on the ASX 200. If the sector faces tough economic conditions and tech stock prices decline sharply, this will also trigger price losses on the ASX 200 index.

• Commodity Prices

Commodities support many economic activities of various companies, which affects the stocks of commodity companies. For instance, the ASX 200 has about 5% of its weight in energy. Therefore, changes in the commodity market can have an influence on the overall price of the index.

• Political Events

As broad benchmarks, indices are vulnerable to major political events such as elections, trade wars, or cross-country conflicts. For instance, the UK Brexit event triggered volatility in the UK indices market.

Why Trade Indices?

Indices offer several practical advantages to traders. They include:

• Easy Diversification

Indices provide a quick way to diversify your portfolio. For example, by trading the S&P 500 index, you are effectively exposed to stocks of multiple top companies such as Apple, Amazon, Tesla, Meta, Visa, etc. You do not have to buy multiple individual stocks to gain exposure to their performance.

• Broad and Targeted Exposure in the Markets

Indices allow traders to gain the kind of exposure they desire in the markets. For example, you can trade a national index such as the ASX200 to gain exposure to the Australian or even Asian economies. Alternatively, you could buy a smaller niche index such as commodity indices to gain exposure to the oil and gold markets.

• Clear Price Trends

Indices tend to have smooth and predictable price behaviours. There is generally no danger of sudden huge price swings because of the large number of stocks that impact the overall price.

Only major events that impact the overall markets will result in choppy price action, such as the COVID pandemic which sent markets spiraling.

Index trends also tend to be long-term, making it easier for traders to apply an appropriate trading strategy at any given time.

• High Liquidity

Indices are highly liquid financial instruments thanks to consistent demand and supply. This liquidity ensures they can be actively traded throughout the relevant trading sessions with low spreads and transparent prices.

• Vast News Coverage

Because indices serve as benchmarks, they are some of the most widely covered financial instruments in the news. It is generally very easy to find information about any major index.

This vast news coverage also makes it easy for a trader to get clues about the overall sentiment of an index as well as identify important technical and fundamental insights.

• Benchmarking

Traders can also use indices for other purposes such as gauging market sentiment, assessing investor confidence, and evaluating the risk/reward of a sector or industry. Some traders use indices to model their own personal portfolios and to benchmark the performance of stocks in their respective sectors.

Why trade Indices with AvaTrade Australia?

• Global Regulation - AvaTrade is licensed and regulated in many top jurisdictions . This means you can trade indices with maximum peace of mind, knowing you are trading with a reputable and regulated broker.
• Multiple Trading Platforms - Enjoy the flexibility of trading indices with our various convenient platforms: MT4, MT5, WebTrader, and AvaTradeGO.
• CFD Trading - Trade index CFDs and benefit from leverage of up to . With index CFDs, you can capitalise on both rising and falling markets.
• Comprehensive Educational Resources - Our Education Centre offers plenty of educational resources to help you build and improve your index trading education and skills. You can also learn about the characteristics of different indices and the best strategies to trade them.
• Favourable Trading Conditions - Trade your preferred indices with transparent prices, low spreads, and fast execution at all times.
• Practical Trading Resources & Tools - Utilize AvaTrade’s handy trading resources such as Trading Central to identify more opportunities in the markets, plus AvaProtect can reduce risk exposure.
• Excellent Customer Support - Contact our professional and responsive customer support team to get prompt and professional assistance.
• Demo Account Trading - Use your AvaTrade demo account to test, practice, and refine your indices trading. Then, switch to your real money account and start earning.

Ready to trade Indices? Open an Australian account with AvaTrade!