Investing Uncovered – What Moves Index Prices?
The stock market is a huge investment entity, and one that saw its global market capitalisation across exchanges peak at $112 trillion in July 2023.
This market is also quite diverse from an investment perspective too, as it comprises options both in terms of individual equities and so-called “indexes”.
Of course, it can be hard to quantify the precise value of all stock market indexes, although the blue-chip S&P 500 recorded an estimated market cap value of $40.73 trillion as of December 2022 and this is expected to rise incrementally over time (despite short and medium-term fluctuations).
In this post, we’ll explore indices in a little more detail, while asking what factors impact their prices and whether the asset class is suitable for mature investors.
In simple terms, indices represent a mensuration of the price quality across a specific lot of financial shares, which usually comes from a currency exchange. Indices can feature companies from a specific industry or country, while they typically focus on small, mid or large-cap entities.
For example, the S&P 500 lists the largest and most prosperous companies based in the US, whereas the iconic FTSE 100 tracks the biggest large-cap equities currently listed on the LSE (short for London Stock Exchange)
The theory goes that trading indices affords you access to acknowledge the performance of an entire economy or sector all at once, minimising your exposure to risk through just a position and financial investment. This makes perfect sense too, due to the sheer number of nations, industries and market cap values represented by different indexes.
It’s also ideal when accessing the markets live through your chosen trading app, with even the best forex trading platform often offering access to a variety of asset classes including stocks and indexes.
Market cap values use to calculate most stock market indices according their component enquiries. This method is better for measuring for large-cap companies, meaning that their individual performances will have a direct influence on index’s value more than the small-cap alternatives.
However, there are some well-known indices (for instance, the Dow Jones Industrial Average) that are weighted according to price. It’s important to understand these distinctions, so you can help to calculate trades and price shifts in real-time.
This means that those greater-weighting companies will be rewarded with an increase in share prices, which in turn means that the values and ongoing price fluctuations will have an impact higher than normal on the real-time price of a particular index.
What Contributes to Moving and Fluctuating Index Prices?
As we can see, the way in which an index is weighted will have a direct impact on how individual equities are priced.
However, there are a myriad of other factors that move index prices, with the single most influential including the fundamental principle of demand.
More specifically, increased demand will typically drive positive market sentiment, increasing prices accordingly and in real-time. Supply is not typically a factor when trading indices, of course, as you won’t assume ownership of the underlying asset and will instead merely speculate in individual price trends and movements.
For price-weighted indexes such as the Dow Jones, another key factor is fundamental factors such as company earnings and profitability during a specific reporting period.
After all, such factors will have a direct impact on each company’s real-time share price, adjusting their weighting in the index and its live price in the process.
In truth, each of these factors need to be considered in unison when indices trading, so that you can pre-empt price movements and make more informed decisions.
Understanding such triggers also allows you to be proactive rather than reactive in the market, affording you a potential edge when trading.
The Bottom Line
So, there you have it – a comprehensive overview of stock market indexes, how they’re structured, and the various ways in which they can be valued.
At their core, stock indexes can play a key role in portfolio diversification, while this also makes it possible to trade shares and equities speculatively and with a greater degree of flexibility.
The question that remains, of course, is are stock indexes suitable for older and mature investors? The short answer is yes, although indexes shouldn’t comprise the majority of an older investor’s capital.
Instead, portfolios should comprise mostly bonds and individual stocks, which represent reliable buy and hold investment assets that are secure, mature over time and payout regular dividends that can replicate a regular source of income.
This article is for informational purposes. We advise consulting financial professionals before making significant investment decisions.
Photo by Jamie Street on Unsplash