Trading traditional stocks is not the best way to get involved in the financial industry, considering that now we have other instruments available. As we will see in the following paragraphs, stock trading carries several flaws that can be avoided by trading indices. Diversifying in trading can be a hard task and managing ten or more different trades could be overwhelming even for most of the professional traders.
Advantages of trading indices
By trading indices, one can have exposure to a particular collection of stocks and thus manage trades based on a broader market perspective. The Dow Jones Industrial Average, one of the oldest and most popular indices from the US, is a price-weighted index that contains 30 stocks from sectors like tech, fintech, healthcare, industrials, consumer discretionary and others. Similar to the Dow, we have the DAX 30 in Germany, and FTSE 100 is the main index of the London Stock Exchange. You should not forget the S&P 500 or Nasdaq Composite, and Nikkei or ASX200 for those who are interested in the Asia-Pacific region.
With traditional stock trading, you’ll have to face a low liquidity environment, poorer execution, higher spreads, and commissions. Now that brokers like easyMarkets, forex.com, and others had included indices in their trading list, you have a much better alternative.
Professional traders don’t try to find “the next big hit”, but diligently trade dominant companies in each industry. Those are the ones with the highest potential for growth as the economy expands, which is why trading indices is one of the most suitable alternatives for retail traders.
Your reaction to volatility?
If we talk about stocks, we can agree that after cryptocurrencies, it is the most volatile asset type in the financial industry. Moves of up to 15-20% can happen in less than a day in stocks, while with indices we rarely see a 2% daily variation.
That happens because indices are generally a mix of large-cap stocks and liquidity is much higher, as compared to an individual stock. Your psychology will play a major key when dealing with volatility.
Ask yourself whether you can bare high volatility and think about how you’ve reacted in situations when you saw prices move up or down by a meaningful amount. If you’ve lost your temper and acted irrational, then it is very likely that you should focus on more liquid trading instruments and indices represent one of the many options.