What are indices and how to invest in them

Investing in indexes is a bit different from investing in stocks: when you choose an index, you invest in whatever it is comprised of, as opposed to stocks, which you can pick individually. The first thing you need to do is find out how to search for a specific index, which funds are best and how your investment is properly balanced.

How do I find an index that’s worth investing in?

Indexes are inevitably linked to index funds, and it represents a means of measuring change in performance when it comes to a cluster of stocks. Famous index examples include the Dow Jones and the S&P 500 in the US, Nikkei 225 for Japan and FTSE 100 for the Brits.

Here’s how you recognize a valuable index when you see one:

  • It’s transparent. All its securities are out in the open, and you also know what type of securities it includes.
  • The turnover is minimal. The manager that tracks the index has a lot of work on his/her hands if a lot of securities are replaced during the year. This will automatically inflate costs, which will show in taxes.
  • It makes sense. When securities are not chosen according to popularity, but according to objective standards, you know you’ve got yourself a winner.
  • It represents a whole market. Ten stocks put together are not representative for a market. A good index should illustrate a sizeable part of the economy, so..the broader it is, the better.
  • It has a global impact. If you are hoping to retire from juggling with indexes, you need to choose something relevant to the world not something that tracks the price of keychains or no-name razors. Pick popular indices that actually impact the economy.

Do your research

There are over 300 index funds and 700+ ETFs, so…how do you make the right choice? First of all, you have to decide what kind of investment your portfolio lacks. Long-term evolution involves stocks; bonds have proven to be the most stable form of investment, but you could balance the two and easily raise your profits. To stay on the safe side, choose both US and exterior stocks, from both smaller companies and industry giants. Diversity is the key to profits!

How to re-caliber your indices investment

As time goes by, diversification disappears. You get to caught up in a certain type of investment, so rebalancing should become a priority. You need to let go of attachments and dump recent spikes, to purchase low and later on sell big.  

To re-adjust your investment, use the calendar method: every six months, re-evaluate your investments. Ideally, you should buy/sell anything in your portfolio that has grown/decreased more than 10% from its initial position. For those of you with a smaller portfolio, 15% is the ideal percentage.

Conclusion

Indices are the way to go if you’re looking to keep your portfolio as diverse as possible. Like all trading assets, index investment need a lot of preliminary research, so make sure you do your homework before actually placing your bid.

Indices

SYMBOLDESCRIPTIONTRADING HOURS
(MT4 TIMES)
CONTRACT SIZELEVERAGEMINIMUM TRADE
(SIZE IN LOTS)
AVERAGE SPREAD
NASDAQFuture E-Mini Nasdaq 100 Index00:00-21:00, 21:30-22:00, 23:00-24:0020 contracts1,500,104,20
DOW JONESFuture Mini-size dow index00:00-21:00, 21:30-22:00, 23:00-24:005 contracts1,500,106,20
S&P 500US SPX 500 Index00:00-21:00, 21:30-22:00, 23:00-24:0050 contracts1,500,102,60
CAC 40France 40 index07:00-21:0010 contracts1,500,103,20
IBEX 35Spain IBEX 35 Index08:00-19:0010 contracts1,500,107,20
NIKKEI ($)Future on NIKKEI 225 (Japan)00:00-21:15, 23:00-24:0010 contracts1,500,107,00
SMIFuture Swiss 20 index07:00-21:0010 contracts1,500,105,20