Where To Invest

There are significant advantages in trading an index over individual shares.

Here are seven of them:

1) When trading an index you are trading a more reliable indicator than when trading a share. The share price can be manipulated but it is harder to manipulate an index. The reason for this is an index consists of a number of different companies that represent billions of dollars. The Dow Jones Index (DOW) consists of only thirty companies, but they are thirty of the top companies in USA. If they go broke, the USA is bankrupt overnight. This will not occur because only companies in good standing are represented in the index. If a company does not comply with the conditions to be included in the index, it is removed. Besides the DOW, there is the S&P 500, the FTSE 100, the Eurostoxx 50, Nikkei 225, the Heng Seng, the SPI 200 and many more. All these indices are comprised of quality companies.

2) Because these indices represent quality companies there is considerable volume being traded in the derivatives as funds and large private investors hedge their investments in individual companies.

3) When investing in a company, you need to be like Warren Buffet and make a business decision based on sound fundamental facts. This means doing research into the company, the competition and the industry. It also pays to have an understanding of the management, as well as much inside information as possible. This requires quite amount of time, Unless you are going to buy a business, or intend to be a major investor in a company, there is really no need to invest time and energy in researching and seeking out this information, when all you have to do is understand how to read a chart.

4) An index can be traded during market hours and outside market hours. Because of this indices can be traded virtually around the clock. This gives a lot more flexibility for the smaller trader, who cannot buy and sell shares outside market hours.

5) The indices enable you to get greater leverage for your dollar, which means you are able to make more money on a market move. In fact, using cfds you can get leverage up to 2000%. What this means is you have access to $200 leverage for every $1 outlaid. With $100 you are leveraging $2000 and this can mean significant profits. Instead of having to find $200,000 cash to play an index with to make a living, you can have the same purchasing power $10,000 because of the power of leverage. This means that you can trade an index with $10,000 and invest your $190,000 elsewhere. Or if you do not have $200,000, at least you can have the same trading power with only $10,000,

6) There are no issues about short selling indices. You can just as easily take a position where you can make a profit in the shares going up or going down. There is no complicated formula. There is no need to borrow shares. There is no need to pay interest. When there were bans put in place on short selling shares, there were no bans on the indices. This is because the indices do not affect the sharemarket, instead they reflect what is happening in the sharemarket. When share prices fall, then the value of the indices fall with them. The indices themselves cannot be manipulated, since they rely on the underlying sharemarkets to determine their value.

7) The indices provide a better reflection of market psychology than individual shares. Individual shares may rise and fall with the general mood of the market, but they will all not rise and fall in the same way. Different shares in the same industry sector will vary in performance, but this will not affect the index because it reflects the overall position, so there is no concern about being on the worse performing stock. This means all that a trader needs to do is understand how to read a chart that reflects the psychology of market participants and utilize money management techniques.

Author: Happy Riches
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