A stock index (stock index) is an indicator of the general price changes for some or all securities that are presented on a particular market. The index is built like a portfolio, in which the importance of each security corresponds to its weight in the market.
S&P 500 Index
The S&P 500 or Standard & Poor’s 500 Index is an index that includes shares of the 500 most capitalized US companies that are publicly traded on the NYSE and NASDAQ stock exchanges. If the indicator grows, then on average all 500 stocks grow, and vice versa.
This index was introduced in 1957 by the rating company Standard & Poor’s to reflect the economic situation in the country.
How is the S&P 500 compiled?
The key indicators by which companies are selected for this index are:
Capitalization must be greater than or equal to $11.8 billion.
At least 10% of traded shares must be in free float.
The company’s profit for the last quarter and total profit for 4 consecutive quarters must be positive.
The volume of traded shares per month is at least 250,000.
As can be seen from the criteria, not all companies can show stable results for a long time. Therefore, the S&P 500 index periodically rebalances. Rebalancing involves changing the weight of companies in the index. But more often, companies are added or removed from the index.
Companies that are part of the S&P 500 are divided into 11 sectors of the economy:
- IT;
- finance;
- healthcare;
- energy;
- telecommunications;
- industry;
- consumer goods of constant demand;
- consumer goods of cyclical demand;
- raw materials and supplies;
- real estate;
- public utilities.
The index is designed in such a way that the larger the capitalization of a company, the higher its contribution or weight in this index. This is important because the top 10 companies make up about 25% of the entire index, and the top 50 companies generally make up more than half of the entire index. For example, Apple’s weight in the S&P 500 is 6.2%, the most of any stock in the index since 1980.
NASDAQ 100
This is an index that includes the shares of 100 of the most significant non-financial companies on one of the largest US stock exchanges NASDAQ. This list includes companies in the United States and other countries from a wide variety of industries:
- high tech;
- retail sales;
- healthcare;
- MEDIA;
- biotechnology.
Stocks that are included in the NASDAQ-100 index are “weighted” depending on their market capitalization. But there are restrictions that prevent large companies from having too much influence on the formation of the value of the index. Their maximum allowable value is 24% of the weighted value of the index itself.
Dow Jones
An index containing only 30 large US companies from different sectors.
In the modern world, this index reflects little, but its century-old history speaks of success. After all, the index was created on May 26, 1886.
Dow Jones contains about 1-2 companies from each industry.
How to find them?
On the Movo platform, indexes can be found in the “Indexes”.
Trading hours for major stock indices coincide with the stock trading schedule —
from 10:30 UTC-3 to 17:00 UTC-3.
At the moment, on our platform, it is possible to trade only the S&P 500 index, but very soon the list of this type of asset will expand.
Advantages and disadvantages
There are many advantages to trading indices. The main ones are:
- Analytics. You don’t have to look at every stock to get an idea of the mood of the market participants, you can follow just one or a few indices for this.
- Diversification. Thanks to indices, you can significantly reduce the risks of your portfolio. If you decide to buy only a couple of stocks, there is a high probability that they will fall more than the index itself. Strong companies partially offset the decline of weak ones.
- Yield. In the long run, indices always rise in value. Thanks to rebalancing (this is when new, more profitable companies are included in the index and old ones that show poor results over a certain period are excluded). Throughout its history, the S&P 500 has outperformed all hedge funds in terms of returns. Warren Buffett’s famous experiment showed this clearly.
- Suitable for all trading styles. Due to its price, short-term traders can make great money. On Movo, it is possible to use a multiplicator and increase the trading volume and potential profit at times. For long-term traders, this asset is also useful. The index provides stable returns for many years during a bullish trend.
- There are no manipulations. Indices are established markets with little room for price manipulation.
And there are several disadvantages:
- Inaccuracy. Indices reflect only the mood of market participants. Just because you’re buying the S&P 500 doesn’t mean your portfolio will fully reflect the US economy.
- High price. The S&P 500, NASDAQ 100, and Dow Jones indexes are worth more than one thousand dollars. Because of this, the availability of indices is much lower than that of a single stock. But due to the fact that Movo has the ability to split an asset, this disadvantage is completely leveled. $5 is enough to trade on our platform.
Conclusion
A stock index is a measure of the overall price movements of some or all of the securities that are traded in a particular market. This tool is a really great opportunity for profit. The index is considered a reliable asset in the portfolio of a serious investor because its price will definitely increase in the long run. Even if stocks in a certain sector of the index fall, the price is compensated by successful companies.
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