How Can Stock Indexes be Utilised for Investments?


The world’s financial markets are incredibly and increasingly diverse, both in terms of the available asset classes and the ways in which you can generate a viable profit.

The stock market offers a viable example of this, as while it’s still possible to hold individual shares as secure stores of wealth, you can also trade equities as derivatives and invest in broader stock indexes.

But what exactly are stock indexes, and how can you invest in them in the current marketplace?

What are Stock Indexes?

There are numerous stock market indexes in existence across the globe, with the most prominent examples including the FTSE 100 and the S&P 500 (we’ll touch a little more on these below).

While these entities may reflect different industries, marketplaces and national economies, it’s the overall performance of the businesses included within that drive the overall price of the index and the level of demand that exists in the stock market as a whole.

This is noticeably different than investing in individual stocks, particularly as it helps you to minimize your exposure and distribute the risk over the performance of a far broader range of assets and companies.

We should also note that stock market indexes serve as powerful indicators for global and country-specific economies, so investors can also use them to gauge the performance of their wider investment portfolios.

What are the Main Stock Indexes?

The US is home to the most prominent and popular stock market indexes, including the Dow Jones Industrial Average, Nasdaq Composite and the aforementioned S&P 500.

These lead a market of more than 5,000 such indexes in the US, while other prominent global examples include the UK’s FTSE 100 and Germany’s DAX Performance Index (which tracks the nation’s top 30 equities).

Both the S&P 500 and the Dow Jones include some of America’s leading blue-chip stocks, with the former listing the top 500 businesses in the US. The Dow Jones is home to companies like Goldman Sachs, IBM, Cisco, American Express and McDonalds, so it offers an eye-catching option for both new and seasoned investors alike.

Conversely, the Nasdaq Composite is focused on the world’s leading tech stocks, including Apple, Netflix, Microsoft, Amazon and Facebook.

There are variations within this asset class too, such as the Nasdaq USTEC index. This represents a capitalisation-weighted index of the 100 largest non-financial companies listed on the NASDAQ, so it introduces some much-needed diversity for investors.

How to Utilise Stock Indexes for Investments

As we’ve already touched on, such premium indexes often reflect the performance of a country’s or region’s economic performance, while more focused alternatives can indicate the trajectory of a particular market or industry.

So, if you suspect a boom in the economy (which may occur this year with global economic growth expected to return), you’d be advised to invest in a popular stock index such as those listed above.

The reverse is also true, of course, unless you have a short-term outlook and want to profit from short-term movements and volatility in the stock market.

However, this is best left alone unless you’re an experienced trader, as such a strategy can cause you to lose considerably more than your initial deposit.

Carolyn Coley is a blockchain reporter. She joined Smartereum after graduating from UC Berkeley in 2018.


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