Index trading has become very popular recently because of its many advantages compared to other types of investments. For example, you can understand and use Index trading easily and can make investments from an internet-connected computer anywhere in the world and at any time. In addition, as you will also be taxed lower on the profits that you generate from this form of interchange compared to other types of investments, this makes trading indexes an exciting business opportunity. You also have the opportunity to profit equally well under both bearish and bullish market conditions.
So, what are indexes? They are basically a selection of stocks that have been grouped according to a certain criteria. For example, the Standard and Poor (S&P) 500 comprises those stocks from the top 500 largest corporations in the world while the Dow Jones Industrial Average (DIJA) includes the top 30 most traded stocks. Each index assesses and tracks the financial markets by using several techniques and tools.
Index trading especially suits those traders who like to specialize in the volatility of the stock market but do not have the inclination or time to perform exhaustive investigations into individually quoted companies. Consequently, you will still be able to make informed decisions whether to open ‘call’ or ‘put’ binary options by undertaking a much broader viewpoint of the stock markets. You can then track the movements of your chosen indexes on a regular basis by monitoring the data updates supplied by companies such as Reuters.
By trading index options, you can speculate on much broader market movements by making just one evaluation and decision at a time. This contrasts dramatically from trading stocks and shares directly when you have to undertake detailed research into all those companies that interest you. Consequently, the advantage of trading the stock market by using index trading is that you can avoid copious amounts of technical and fundamental analysis.
In addition, you have the prospect of trading indexes around the clock. Many traders take advantage of this fact in order to gain additional insights into how Wall Street will react to overnight developments when it opens at 9.30am EST. You can increase your success at performing this activity if you acquire an appreciation about what are the main driving forces affecting the markets overnight.
You also need to know the opening hours of all the prime global index markets. For instance, if you follow the twenty-four hour clock around the globe then the first market to open is the Nikkei in Japan followed by the Hang Seng in HongKong. Consequently, if you can gain insights into what is driving price movements on these Asian markets then this information will help you greatly to evaluate the Dow Jones Index and S&P500 when they open later in the day.
The trading of Index options was first allowed on the financial market in 1981.
Index options are based on underlying financial indexes in an identical way to equity options. One of the main advantages of trading index options is that they allow you to be diversified into the overall stock market or just a selected sector with just single investment decisions and transactions. In contrast, if you traded the stock market directly, then you would have to make an evaluation and decision for each company of interest.
A popular binary options trading strategy entails hedging a binary option based on a company’s shares with one whose underlying asset is the trade index that includes the same firm. For example, imagine that you decide to open a ‘call’ binary option with Apple because you think the value of its shares will appreciate in the near future. In order to hedge this bet and if you also believe that the stock markets will generally fall in value, you could also consider activating a ‘put’ binary option based on the S&P500 of which Apple is a composite company.
Consequently, this strategy will help you minimize your risk and allow you to support your trust in trading your selected asset. In addition, you could provide yourself with the opportunities to compound your profits, maximize your returns and minimize your risk exposure. For instance, with the example just described you could achieve a double profit pay-out if your calculations prove correct.