A stock index is a group of data on multiple stocks that reflects the value of the constituent stocks on the market. It is often used to show the common characteristics of the constituent stocks, such as stocks that are traded on the same stock exchange, belonging to the same industry, or have similar market capitalisation. There are mainly three types of stock index by the method of calculation. The first type is price-weighted index, such as the Dow Jones Industrial Index, which is formulated by calculating the prices of a few constituent stocks. The second is market-value weighted index, which is based on the market capitalisation of different stocks in the index, such as the Standard & Poor 500, and the Hang Seng Index. The third type is market-shared weighted index, which is calculated based on the weighted average number of shares instead of market capitalisation.
In contrast with the stock market, trading stock indices allow investors to enter the overall market without specific stock risks and to track the trend of the most active stocks. It is not the case that you may buy stock only when the market is predicted to rise. You may enter the market when it fluctuates in either direction, which increases your profit opportunities. Moreover, due to the high trading threshold, stock index trading usually requires a large investment amount, while stock index CFDs allow investors to trade smaller contracts, so they can buy a basket of stocks at lower costs and easily enter the investment arena.
Please note: CFD trading carries a high level of risk and is not suitable for all investors. Please read the Risk Disclosure Statement before choosing to start trading.
There are multiple factors affecting a stock index, chiefly in three macro aspects.
First, changes in market interest rates will have a significant impact on the stock market. Generally, pricing for a stock index rises as interest rates fall, and falls as interest rates rise. Therefore, interest rate levels and the relationship between interest rates and the stock market have become important indicators for investors to go long or short stock indices. Whenever the government announces a rate cut or a reserve requirement ratio (RRR) cut, the borrowing costs in the market will fall, and the stock index often rises in the short term. However, when a rate hike is announced, the stock index reacts to the contrary.
Secondly, inflation usually has a significant impact on the stock index. Modest inflation can stimulate the stock market, while severe inflation will weigh on it. Inflation occurs mainly because the central bank increases the money supply too quickly. Generally, the money supply is directly proportional to stock prices, i.e., a larger money supply will cause stock index pricing to rise. When the central bank tightens to suppress inflation by raising interest rates, the stock index will go down.
Thirdly, government fiscal policies will have an impact on the stock market. The government's substantial tax cuts, increased public spending, etc., may stimulate expectations for corporate earnings, causing the stock index to rise in the short term.
Before choosing a stock index for trading, you should first understand the similarities and differences between different markets, basic economic conditions related to stock indices, national policy changes, monetary policy directions and other fundamental factors. You also need to understand technical changes in the stock index, bull and bear cycles, etc. If you are familiar with some stocks, or a country's economic conditions, you may choose to trade the local stock index. Or you can assess which market is more suitable for yourself based on the average daily trading volume of the stock market related to the stock index.
Corporate actions refer to events that cause significant changes in the company's share prices. When you are trading, the corporate action that heavily affects the stock price is usually distribution of dividends. If you hold a buy order for the stock index past the time of dividend distribution, you are entitled to the corresponding dividend. Conversely, if you hold a sell order for the stock index beyond the time of dividend distribution, you will need to pay a dividend.
By holding a stock index CFD does not mean that you actually own shares of the stock, therefore you do not have the right to vote, or any rights to subscribe, issue or split shares.
However, Mitrade will take measures to adjust interest to minimize the impact of corporate actions on your trading positions.
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