Why do people trade indices?

[PulseRes]

I like to trade stock market indices, bond markets, commodities and forex all together because they are all interrelated and by knowing what is happening in one, one is often able to trade the other with more conviction.

I caught the majority of the recent stock market move simply because of the significant outflow from bonds since April and cash providing negative real rate of return.

 

[cablemonster]

As per the title, why do people trade indices, what is the logic behind it?

Is it because they are less volatile than stocks?
Is there any edge associated with trading indices? - other than the liquidity.:?:
Is it because there is correlation between indices, be it domestic or international?

read chapter 2. better still read the whole lot. will be an eye opener.

http://www.amazon.co.uk/Trading-Exc...3251985&sr=8-1&keywords=trading+and+exchanges

 

[hb7of9]

read chapter 2. better still read the whole lot. will be an eye opener.

http://www.amazon.co.uk/Trading-Exc...3251985&sr=8-1&keywords=trading+and+exchanges

genius, will definitely get this. than you!

 

[neil]

speculate to accumulate

genius, will definitely get this. than you!

Good investment for £55

 

[Tyger]

As per the title, why do people trade indices, what is the logic behind it?

Is it because they are less volatile than stocks?
Is there any edge associated with trading indices? - other than the liquidity.:?:
Is it because there is correlation between indices, be it domestic or international?

I trade S&P500 because of the huge volumes. IMHO this means that it is almost impossible for the market to be manipulated. Thus one is trading on a level playing field.

 

[malaguti]

In my personal view, traders trade indices in the CFD markets because they intend making profit from a fluctuating market, especially when operating on stock indices.

absolutely MightyPen, its not like every market in the world fluctuates is it now. Oh no, just indices and not just any market either... in the CFD market. wtf

 

[algoplex]

Liquidity,volumes traded, volatility, correlation and macro economic/ political influences. However, you have to be aware of what the index is comprised of and if it is weighted towards a particular company or sector. For example, take a look at the market cap of Apple:

http://www.nasdaq.com/screening/com...exchange=NASDAQ&sortname=marketcap&sorttype=1

480 billion. Is it the NQ? No, but they move in sync much of the time:

http://www.google.com/finance?chdnp...=0&q=NASDAQ:AAPL&ntsp=0&ei=3CKWUsC1A8WUwQPCBA

So, you need to be aware of the constituents and their weighting. Likewise, the FTSE 100 is overwhelmingly Banks and Oil/ Natural resources. So it's weighted towards these sectors.

 

[peter_anders]

I am still looking to make the transition from stocks to futures indices. During my research, I cam across a really good course on Udemy that answered your question and a lot of mine. It also had screencasts of futures trades. I'm not sure if I allowed to post the link here but if you search for futures trading on udemy you'll find it. It's the Become a Day Trader one

 

[DuCaan]

S&P futures allows good liquidity, leverage, continuous market, there is volatility etc etc

 

[Giovan]

1) Short term trends are more rewarding than in FX
2) Lower margin/higher leverage- $400 intraday
3) Better reactivity to fundamentals than FX

 

[A Dashing Blade]

They are certainly not less volatile. . . .

Er no, they're not. Vol of an index is vol of the constituants + the cross-correlations between each constituant.
Did a lot of work on this in the early-mid '90's on FTSE (arbitraging index vol against it's constituant's vols), then the numbers were that a typical stock had a vol of 25% while FTSE's was circa 18%

 

[andrewdb]

Er no, they're not. Vol of an index is vol of the constituants + the cross-correlations between each constituant.
Did a lot of work on this in the early-mid '90's on FTSE (arbitraging index vol against it's constituant's vols), then the numbers were that a typical stock had a vol of 25% while FTSE's was circa 18%

Can I interpret that as being on average, about 75% of a change in the price of one stock is due to changes that apply to all stocks ( and about 25% of a change is driven by the company itself? )

 

[Vicorka]

As per the title, why do people trade indices, what is the logic behind it?

Is it because they are less volatile than stocks?
Is there any edge associated with trading indices? - other than the liquidity.:?:
Is it because there is correlation between indices, be it domestic or international?

For me it's that by trading indexes you skipping the complexity of fundamental analysis during the stock analysis and stocks selection. An index's issuer analyzes stocks listed in an index and update the listing by removing weak stocks. It is make an investor's life easier when this job done by such companies as Standard & Poors, Nasdaq, Dow Jones Journal and etc. People are lazy by their nature and looking for easier ways. Of course, you can spend 12 hours every day to analyze 500 stocks in your portfolio and there is the possibility you will outperform the S&P 500 index. However, on my opinion it is much easier to analyze S&P 500 index and try to outperform it by trading SPY, ES emini and etc...

 

[psaTrading]

Because they are more predictable than stocks!