2.1 Understanding Different Types of Indices

Market indices act as benchmarks that measure the performance of a market, sector, or group of companies. Each index is built using predefined rules, depending on what it aims to represent.

While an index can theoretically be created for any market segment, only a few become widely used and trusted. For example, the S&P 500, which tracks the largest US companies, is far more popular than niche economic indicators.

Despite their differences, most indices share these key characteristics:

• Indices measure performance; they are benchmarks

• Indices cannot be directly traded or owned

• They are made up of influential securities or assets

• They may be weighted or unweighted, affecting how they move

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2.2 Sectoral Indices vs National Indices

What are Sectoral Indices?

Sectoral indices track companies within a specific industry or sector, such as technology, healthcare, or energy.

They help traders understand whether a stock’s movement is driven by:

• The company’s own performance, or

• A broader move in the entire sector

For example, major tech stocks like Apple often move in line with the NASDAQ 100 because large companies carry more weight in the index.

Examples of Sectoral Indices

• Energy Select Sector Index (IXE) – Focuses on oil, gas, and energy services

• Health Care Select Sector Index (IXV) – Covers pharmaceuticals, biotech, and healthcare services

• Nifty FMCG – Tracks major Indian FMCG companies

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What are National Indices?

National indices track the top companies listed on a country’s main stock exchange, regardless of sector.

They provide a quick snapshot of a country’s overall stock market performance.

Examples of National Indices

• Nikkei 225 (Japan) – Tracks 225 major Japanese companies

• Straits Times Index (Singapore) – Tracks the top 30 companies on SGX

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Key Differences: Sectoral vs National Indices

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2.3 Large-Cap, Mid-Cap, and Small-Cap Indices

Companies are often classified by market capitalisation, calculated as:

Share Price × Total Shares Outstanding

Based on size, companies fall into three categories:

Smaller-cap indices tend to be more volatile, while large-cap indices are generally more stable.

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2.4 International (Global) Indices

International indices track stock markets across multiple countries, offering a global view of market performance.

They are widely used to:

• Measure global economic trends

• Compare portfolio performance

• Create global index funds

Examples of Global Indices

• Dow Jones Global Index

• MSCI ACWI Investable Market Index

• FTSE Global All-Cap Index

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2.5 ETFs Tracking Indices

Indices themselves cannot be bought or sold. Instead, traders can invest in index ETFs, which are funds designed to replicate an index’s performance.

Benefits of index ETFs:

• Easy diversification

• Lower capital requirements

• No need to research individual stocks

However, ETFs charge management fees, which slightly reduce returns.

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2.6 Indices vs Index ETFs

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2.7 Indices CFDs

Indices can also be traded using Contracts for Difference (CFDs).

With indices CFDs:

• You speculate on price movement (up or down)

• No actual stocks or funds are owned

• Profits or losses are settled in cash

Advantages:

• Ability to go long or short

• Lower capital requirement

• Suitable for short-term trading

CFDs involve leverage, which amplifies both profits and losses, making them more suitable for experienced traders.

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Module Recap

• Indices measure market performance but cannot be directly traded

• Sectoral indices track industries; national indices track countries

• Indices can be grouped by company size (large, mid, small-cap)

• Global indices track worldwide markets

• Index ETFs allow investors to replicate index performance

• Indices CFDs enable speculative trading and carry higher risk