While some people choose to invest in real estate or retirement plans, others invest in stocks. Investing in stocks is an effective way to build wealth and put your money to good use.
However, if you want to outpace inflation and increase your wealth, then you need to be intentional about which stocks to put money behind. Indices measure the performance of a group of stocks from an exchange, allowing you to speculate on the price before making a dramatic financial commitment.
Whether you’re a novice trader or experienced in trading stocks, indices can offer a lot of value.
Understanding How Indices Work
Stock markets are typically calculated based on the market capitalisation of their component companies. Indices help buyers trade effectively by serving as market indicators, performance benchmarks, and tools for research and analysis.
Some of the most popular examples of indices in the world include S&P 500, Nasdaq 100 and DAX 30.
Indices give investors the opportunity to evaluate the performance of securities. They also allow investors to actively manage funds and investment portfolios.
Several factors can impact the price of an index, including;
- Economic news that triggers volatility
- Release of a company’s financial results
- Company announcements, especially mergers and changes to leadership
- Weighted indices are affected by a change to their composition (when companies are added or removed)
- A shift in commodity prices
Opportunities and Risks of Investing with Indices
As with all investments, indices offer both opportunities and risks.
Opportunities of Investing with Indices
Indices attract investors for various reasons, including the following.
- Low fees as the index fund mimics the underlying benchmark
- No bias investing as index funds follow an automated investment method
- Broad market exposure across sectors and stocks
- Easier to manage
Risks of Investing with Indices
Before investing with indices, you should consider the following features.
- Index funds returns may be limited as they don’t try to beat the benchmark, only match it
- Lack of flexibility to react to price declines in the index securities
- Possible tracking error
- Underperformance as a result of fees and expenses, trading costs, and tracking errors
Note: Please do not invest money or assets in the financial markets that you cannot afford to lose. This article should not be construed to be investment advice and is for information purposes only