You may have heard the word ‘index’ mentioned in many financial media. Market Index represents the pulse from the market. The information they provide can give you meaningful insight to make better investing decisions. Thus, here is market indexes effect on your investment.
The explanation of index number
There are various ways to calculate index numbers. But, it always represents a change from the base or original value. While the base value itself represents the average price of weighted-stocks from the total stocks. That price will later make up the index.
If we take a look at the importance level, basically the index number is less important than its percentage change over time. The movement of that percentage will tell you the performance of an index.
Yet, to know the changes, you need to know the index number first. It is calculated each day on an ongoing basis, during the stock market’s open hour. The aim of that index will give a direction for the market represented by the index.
What traders need to be cautious is that the stock index, even the ones quoted as totally representing the total stock, will not do that. Every stock index only reflects parts of the actual market.
That happens since each index normally only holds stock from certain sectors or categories within the market.
Also read: How Long You Should Hold your Stock in Day Trading Position?
How to read it?
Every time you analyze and interpret changes in an index, you need to consider these factors.
It does not represent the total market
Even when something happens in the world’s biggest index, you have to stay focus on your stocks and your targets for evaluation. In a day that all of those three indexes are down, you still can see some stocks still set a new high.
Indexes react to actual trades
You may believe what people told you in media, that stocks move based on emotion. The truth is, index movement requires actual trades, not just feelings.
Focus on time by time
You have to always focus on day by day and hour by hour clicks of an index. Those clicks make for a good way to eat up valuable time.
It provides a better historical perspective
Rather than forecasting, indexes give a better historical perspective. View on a long historical period can be more helpful when your research on-trend.
