Stock Index Trading, A Quick-Start Guide

As well as offering Foreign Exchange and Precious Metals trading Blackwell Global provides its customers with the ability to trade in a range of international Stock Indices. (see here for details)

These indices track the rise and fall of leading stocks within the world’s major equity markets. Allowing our customers to trade trends and trend changes in these important  financial barometers and to potentially profit from their rise and fall.

What is a Stock Index

A Stock Index is, in its simplest form, a measurement of the performance of its component companies. Tracking changes in the index value provides users with an “at a glance”  snapshot of the performance of this basket of equities. Which of course is much easier to do than tracking the movements of say 100 individual share prices.

How is a Stock Index compiled ?

When a Stock Index is first compiled the valuation or share prices of the individual component companies are recorded and rebased or indexed to a notional starting level.

In the case of the UK top 100 index (which has measured the performance of the top 100 UK companies since January 1984). That notional starting level was 1000. Since its inception the index has risen more than six fold. Once a stock Index has been compiled changes in the prices  of the underlying constituents stocks are collected, totalised and reflected in a change in the value of the overall index.

Many of our pensions and other long term investments are likely to be directly linked to the performance of such stock indices. The names of major stock benchmarks are familiar terms these days and their values are regularly reported in news programs on TV and radio, in the newspapers and on the screens of our mobile phones.

What factors can affect the value of Stock Indices ?

As we have already noted the value of a Stock Index is determined by the performance of its underlying members, individual share prices. Put simply if the majority of these underlying share prices rise then so will the value of the index. Conversely if the value of these underlying share prices fall then the value of the index will also fall.

Highly researched

As with other modern financial markets, Stock Indices and their underlying constituents are  are highly analysed by banks, brokerages and individuals around the world.This detailed  analysis means that investors and traders form what is called a consensus forecast for an index. Which if you like is the “common” view about how the index should perform in the future.

Analysts and traders look at many metrics when forming their view. These include items such as revenues, earnings and earnings growth, the level of dividends paid by index constituents and so on. These metrics are then weighed against historical ratios and norms allowing us to view those consensus predictions for a Stock Index in that context. This is the  type of information that can inform decisions on Stock Index Trading.

For example if the consensus for an index is that its constituent companies will significantly increase their dividends over the next 12 months. Then it’s likely that investors will wish to buy or go long the index, so as to be able participate in that growth. Conversely if a Stock Index earnings are expected to contract significantly over that period, then investors are likely to choose to sell the index instead in anticipation of it falling in value.

Multiples

In essence then a Stock Index reflects investor attitudes towards equities and their prospects. And these attitudes are also reflected in the multiples that investors are prepared to pay to own a Stock Index.

For example let’s assume that we have an index with a current value of 100 and its underlying constituents are expected to produce combined earnings of £10.00 per share for the coming year. This means that, at a value of 100, the index is on a multiple of ten times its expected earnings (10*10 =100).

If investors buy the index and its value rises to 120, without any change in earnings expectations, the index can be said to be trading on a multiple of 12 times. Of course if the index then rallies further, for example, to a value of 200 (again with no change in earnings expectations) then it will be trading on a multiple of 20 times its expected earnings.

A comparison of these multiples against both historical data and the multiples prevailing for other Stock Indices allows traders to form an opinion about whether an index is looking “cheap” or “dear” relative to those metrics.

Sentiment and other factors in Stock Index Trading

Markets are said to be forward looking and Stock Indices are thought by many market participants to price in expectations for the next six months or two quarters ahead.

However as with nearly all modern trading,short term changes in sentiment and other factors can and do affect Stock Index Trading . But not always in the way we might expect.

For example US Stock indices have benefited from historically low interest rates for most of the last decade. To the extent that currently any negative data releases which prevent the US Federal Reserve or Fed (the US central Bank) from raising interest rates, are likely to be seen as positive for US Stock Indices. Regardless of whether that data is harmful to the economy as a whole.

However by the same token positive economic data that shows a growing US economy could well be considered as a negative for US Stock Indices. Simply because it might provide the Fed with the ammunition it needs to start raising US interest rates once more.

Currency effects

Another example of external factors driving changes in the value of a Stock Index can be found in the fall of the value of the British Pound, post the Brexit referendum in June 2016.

The pound fell by as much as 10% or more against the US dollar immediately after the referendum. Whilst the UK top 100 index bounced strongly over the following days and  weeks, as UK exports became significantly cheaper to overseas buyers.

Surprising? on the face of it perhaps. But not when you realise that seventy percent or more of the revenues of the UK top 100 index are generated overseas. see here. Weaker currencies have, in recent history, also driven gains for export led Stock Indices in both Germany and Japan.

Macro view

Blackwell clients can use our Stock Index contracts to take a macro (or top down) view or position on a geographic or regional basis, or on specific group of stocks. For example if you have strong view about the prospects for the US Technology stocks then you can take a position in our US 100 index, which tracks the leading names in the sector. Or if you believed the Japanese economy was likely to show signs of improvement then you might look to buy or go long, on our Japan 225 contract which reflects the performance of  leading japanese shares. The DE30 or Germany 30 contract tracks the performance of Germany’s largest Industrial concerns, many of whom are exporters and so on. 

To summarise then :  

Blackwell Global offers its clients the ability to trade in 10 international Stock Indices via  cash settled CFDs.

These contracts cover leading equity markets in Asia, Europe and the USA. Clients can trade long or short in these Stock Indices with equal ease,without having to worry about taking or making delivery of the underlying instruments.

Stock Index Trading allows clients to quickly allocate capital to a specific geography or region or type of company and to capture both positive and negative macro trends within these groups.  

Our Stock Index contracts offer competitives spreads and extensive trading hours. Full details of which can be found here.

To apply to open a live trading account please click on the live link and complete our registration process.