Index trading offers a more risk averse approach to investing in stock markets. This is because individual equities are grouped together to comprise a single price that reflects the value and performance of an overall basket of stocks. Index trading is also used as a hedging tool against an individual or portfolio holding of equities, although how accurate the index hedge will be is dependent on the relationship between the index and the equity or basket of equities.
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What are indices?
It can be difficult to individually track every instrument trading in a country, so it’s easier to monitor an overall benchmark value like an index. Headline indices for a country generally reflect the largest market capitalised companies listed within the country. However, indices can also represent segments, such as technology or small cap shares.
Why start indices trading?
By allowing traders to take a broader view of a group of equities, indices reduce the risk that comes from trading individual company stocks or shares. When trading global equity indices, traders can diversify their portfolios geographically. This creates opportunities to profit from market movements around the globe.