A lot of beginners in trading tend to get confused when they start learning about indices trading. The term may sound overwhelming, but you can easily get what it’s about.
In an index, stocks are grouped to see the performance of the market. So instead of focusing on a single stock, you can see the bigger picture or the performance of the market as a whole in an index.
An index is the average value of stocks. But since it’s the average, the stocks don’t have the same amount or weight in the index. So it doesn’t mean that when a stock goes up, it automatically affects the entire index, which is one of the common misconceptions about indices trading.
When it comes to the movement of the market price of an index, there are several factors to consider. If you want to know these factors, then you should check the list below!
1. Economic factors
Economic factors that include currency, interest rates, and inflation can affect share prices. If any of these factors go up, there’s a chance that the demand will decrease. And once the demand decreases, the share prices will also go down.
It doesn’t necessarily mean that these factors have the same weight of effect on the index. For instance, the FTSE 100 can be easily affected by currency movements. It means that the other economic factors may not affect the market value of FTSE 100 whenever they change.
2. Company news
Any change or news in a company also affects the share prices. And once top-performing stock moves, it can greatly affect the entire index. Company news may come unexpected and expected, but the effect of the news depends on the factor it’s related to.
Some of the most common company news that may affect share values are earnings, dividends, and new management. For instance, if a company announces that it’ll soon undergo a new management, the stockholders may react differently. So whether it’s a positive or negative reaction, it can still affect the performance of an index depending on how significant the stock is.
3. Industry performance
Are you aware of how different industries are doing? Usually, when an industry is doing well, most companies in the same niche can also perform well.
For instance, if the petroleum industry is booming, companies offering oil, fuel, and petroleum also have the chance to increase the share demands.
However, not every company is guaranteed to receive the same treatment as the others. Sometimes, when a company receives a bad reputation, the others will suffer the same consequences. In addition, there are times when one of the two companies in the same industry performs better than the other depending on how investors and consumers view them.
4. Investor sentiment
The overall performance of an index can also be affected by investor sentiments. Sometimes, the investors lose their confidence to move forward. Unfortunately, it doesn’t happen for just one investor at a time. Usually, confidence comes in bulk.
At a certain point, when the value of stocks goes up, investors tend to hoard a lot of shares. When this happens, there is a possibility that there are more buyers than sellers. On the other hand, when investors think that the value is down, they tend to sell their shares.
5. Political instability
The political climate is usually one of the factors that can bring an entire index down. As you may already know, countries have their index. But once two countries start having conflicts, investors from the other countries tend to withdraw their investments.
In addition, if they favour one country compared to the other, they may increase their support. It depends if the government appears weak or strong. Usually, a government that seems to have strong public support tends to maintain its investors.
6. Market sentiment
Similar to investor sentiment, market sentiment also depends on people’s moods. Market sentiment is the collective feeling of the investor towards the stocks. But although it’s subjective, companies can’t do anything about it, even though other factors like news and performance are doing well.
How can you analyse the price movement?
Although there’s no accurate way to predict whether the market will go up or down, you can use analysis to help you move forward. In indices trading, you can use two types of analysis— fundamental and technical analysis.
1. Fundamental analysis
Fundamental analysis is when you thoroughly study all the aspects of the company to come up with the share value. Furthermore, you can study based on the factors mentioned above. Some traders focus on the economic factors, but you can also cover everything up.
2. Technical analysis
On the other hand, technical analysis is when you predict the future value of shares based on the patterns and charts of the past performance of an index. Moreover, this method uses to predict future price movement.
Now that you have some ideas in terms of the factors that can affect the price of an index, then you can start analysing data and predicting the future. Let us know your thoughts about this by leaving a comment below!
ABOUT THE AUTHOR: Aliana Baraquio is a web content writer at FP MARKETS, a global Financial Technology services Foreign Exchange (Forex) and Contracts for Differences (CFD) broker established in 2005. She also loves reading about interior design and home makeovers.