What is an Equity Index

An equity index, or stock market index, is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used to benchmark the performance of portfolios. The levels of certain indices are used as a method of assessing the status of a nation's stock market in general and as an indication of the nation's economic strength overall.

An index may be classified according to the method used to determine its price. In a Price-weighted index, the price of each component stock is the only consideration when determining the value of the index. This means that price movements of even a single company's stock will heavily influence the value of the index, ignoring the relative size of the company as a whole. In contrast, a market-value weighted or capitalisation-weighted index factors in the size of the company. Therefore, a relatively small shift in the price of a large company will more heavily influence the value of the index, compared with a similar price movement of a smaller company.

Benefits of Trading Indices

General Market View
Instead of having to do a lot of Equity research in order to select the right individual stock to trade, you can take a position, either long or short, on the overall market.

Stability or less market shock
Due to diversification within the broader national Indices, they have inherent stability as no single stock can completely influence the index. As such, one-off dividend announcements or general market announcements have little to no effect upon the index market liquidity.

Liquidity
There is a great deal of activity on the indices which equates to greater liquidity.

Leverage
You can get greater leverage through taking a position on an equity index than by trading the individual shares.