Understanding the Global Stock Index
Since the beginning of time, Global stock indexes have been important benchmarks in global trade. Since our traditional economies are based on trading and business, global economic statistics are an important part of any trader‘s business.
One of the first indexes to be created was the Dow Jones Industrial Average, or Dow Jones as it is more commonly known, in 1871. During this time, trade was often based on currency exchange rates.
The business of commodities markets meant that every good and service had a price. So a farmer who sold wheat for US dollars was also selling his output, and the price he got paid was the value of the output, so his prices were based on the quantity of the product he sold. Currency exchange rate movements were not driven by the value of goods and services in their own right, but by what goods and services they sold for.
In the early 1900s, such indicators started to include index weights for longer term trends, and these became part of the S&P 500. These newer additions to the indicator market resulted in more businesses to become geared towards them. The result is we have a world of indices, and all are related to one another.
Global stock indexes, especially the ones with far greater trading and market scale were designed with the average investor in mind. That meant they focus on products rather than just trading, they put more weight on stability and growth, and they also are far more educated about what they do and how it affects the currency markets.
The complexity of such indices also means that it’s harder to find out about their fundamental value. This has resulted in far more confusing commentary on the subject, as well as much more emotional judgements, rather than facts and numbers.
For this reason, there’s a lot of hype in the media about some short-term movements in indices, with people suggesting that they are making money with them. The fact is that you cannot lose money with them as long as you choose carefully and act smartly in choosing which markets to trade in.
Obviously, the best way to make money from the index is by trading in a well-managed portfolio. Most index funds are highly regulated, so you don’t have to worry about whether a particular index is over-priced over-valued, or under-priced.
There are various ways of doing this. The usual route is to take a large cap index, and then use it to either buy stocks or bonds, depending on your own objectives.
The more market scale indexes are mostly useful for short-term trends, such as when you need a reliable indicator to pick out when to buy or sell. Most traders take advantage of large cap indexes and they are most often used to pick up short-term trading opportunities.
When you trade on large cap indexes, you get more diversification. You get more of a diversified, global outlook that can be used to minimize risk.