A stock is a share in the ownership of a company. Equity is synonymous with a share or stock – these are all one of the same – a share in the ownership of a company. Ownership of a stock represents a claim on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. A stock market index is a measurement of the value of a section of the stock market. Stock market indices can be segregated into two categories: a global index or a national.
A global index includes companies from various regions – it does not regard where the companies are traded – an example of global stock market indices are the S&P Global 100 and the MSCI World. A national index includes companies from a single region and is used to measure the performance of the stock market from that region. The most familiar national stock market indices are the American S&P 500 and NASDAQ, the British FTSE 100, the Japanese Nikkei and the German DAX.
Whist many people are interested in solely trading stocks, one key advantage of trading a stock market index is the hour’s indices are available to trade each day. Trading an individual equity must be done during the opening hours of the exchange the equity is traded on – this is usually between 9am – 5pm local time. Stock market indices are usually open for far longer time periods each day. This means that the time restrictions to trading indices is much lower than that of trading individual equities. Another advantage of trading a stock market index is the diversification it offers. If you are only able to trade equities in the US – due to the limited time available for you to trade each day – then you can limit your exposure to the US stock market by trading a stock market index from another region.
While there are clear benefits to trading a stock market index, it is however difficult to determine the affect one stock will have on the entire index. If the value of one stock included in the index falls dramatically how will the value of the index be affected? What if the majority of the stocks included in the index have increased in value? A successful trader of indices will possess a proven trading strategy in order to capitalise on these price movements when they occur. This is precisely why mastering a trading strategy is paramount to your success.