What Are Indices in Trading?

Indices track the performance of a group of assets, such as stocks, bonds, or commodities.

What Are Indices?

Indices are fundamental instruments in global financial markets. They measure the performance of a group of assets—such as stocks, bonds, or commodities—by combining their prices into a single value. This allows traders and investors to quickly assess overall market direction and sentiment.

For example, the S&P 500 Index tracks 500 leading publicly traded companies in the United States and is widely regarded as a benchmark for the health of the US stock market.

In trading, indices play a vital role by offering a broad view of market performance. Rather than analysing individual securities, traders can use indices to identify wider economic trends and market momentum.

Indices also form the foundation of many financial instruments, including:

Index funds
Exchange-Traded Funds (ETFs)
Derivatives such as CFDs, futures, and options

By understanding how indices work, traders can develop strategies to follow market trends, diversify exposure, and manage risk more effectively.

How Are Stock Market Indices Calculated?

Stock market indices are calculated using different methodologies, each designed to reflect market performance in a specific way.

Price-Weighted Indices

In price-weighted indices, each stock’s influence is based on its share price. Higher-priced stocks carry more weight, regardless of company size.

A well-known example is the Dow Jones Industrial Average (DJIA). The index value is calculated by adding the prices of all constituent stocks and dividing the total by a divisor that adjusts for stock splits and structural changes.

Market Capitalisation-Weighted Indices

Market cap-weighted indices assign weight based on a company’s total market value (share price × outstanding shares).

The S&P 500 is a prime example. Larger companies have a greater impact on the index’s movement. The index is calculated by summing the market capitalisations of its components and dividing by a standardised divisor.

Equal-Weighted Indices

In equal-weighted indices, each company carries the same weight regardless of size or share price. This approach gives smaller companies equal influence and requires regular rebalancing to maintain equal representation.

Why Trade Indices? Key Benefits in 2025

1. Built-In Diversification

Trading indices allows you to gain exposure to multiple companies through a single position. This reduces reliance on individual stock performance and helps smooth out volatility.

2. Lower Relative Volatility

Because indices reflect a basket of companies, price movements tend to be more stable than individual stocks. Gains and losses are often balanced across constituents, making indices suitable for more structured trading strategies.

3. Simpler Market Exposure

Instead of analysing dozens of individual stocks, traders can access entire markets or sectors with one trade. This simplifies decision-making and portfolio management.

4. Effective Hedging Tool

Indices are commonly used for hedging. Traders holding individual stock portfolios can short an index to help offset losses during market downturns, potentially reducing overall portfolio risk.

Most Traded Global Indices to Watch

S&P 500

The S&P 500 tracks 500 of the largest US-listed companies, representing approximately 80% of total US equity market capitalisation. Its market cap-weighted structure makes it a key indicator of US economic strength.

NASDAQ-100

The NASDAQ-100 consists of 100 major non-financial companies listed on NASDAQ. Heavily focused on technology and innovation, it includes industry leaders such as Apple, Microsoft, and Amazon.

Dow Jones Industrial Average (DJIA)

The DJIA tracks 30 major US corporations and is one of the world’s oldest indices. Unlike most modern indices, it is price-weighted, giving greater influence to higher-priced stocks.

FTSE 100

The FTSE 100 represents the 100 largest companies listed on the London Stock Exchange by market capitalisation. It serves as a benchmark for the UK stock market and includes global multinational corporations.

Nikkei 225

Japan’s leading stock index, the Nikkei 225 tracks 225 large companies listed on the Tokyo Stock Exchange. It is price-weighted and includes major Japanese brands such as Toyota, Sony, and Panasonic.

What Drives Index Price Movements?

Index prices move based on a combination of macroeconomic, financial, and psychological factors.

Economic Indicators

Key data such as GDP growth, unemployment rates, and inflation figures influence investor confidence. Strong economic data often drives index prices higher, while weak data can pressure markets.

Interest Rates

Central bank interest rate decisions impact borrowing costs, spending, and investment. Lower rates typically support equity markets, while higher rates can suppress index prices.

Corporate Earnings

Earnings reports from index constituents can significantly affect index performance. Strong earnings often boost indices, while disappointing results can trigger declines.

Market Sentiment

Investor sentiment—shaped by geopolitical events, policy changes, and global developments—plays a major role in index price direction. Positive sentiment drives buying pressure, while uncertainty increases selling.

Supply and Demand

Like all traded instruments, index prices are influenced by supply and demand. Increased buying interest pushes prices higher, while increased selling leads to declines.

Start Trading Indices CFDs with Ohio Markets

Index CFD trading offers diversified market exposure, flexibility, and opportunities in both rising and falling markets. With the right strategy and risk management, indices can play a powerful role in your trading journey.

Open an account with Ohio Markets today and trade global indices with confidence.