Stock trading is when you trade in the stock of a specific company. The price of a stock is determined by an investment firm using complex technology to assess the value of the company. Once the value is calculated, they determine the price and quantity of the stock. It is important to note that when trading stocks, you can only trade stocks of specific companies, whereas when trading CFDs on stocks, you can trade long and short.
On the other hand, index trading involves trading multiple stocks that make up an index through a single instrument. The index tracks a basket of stocks that are used as a representative indicator of the stock market as a whole (e.g., the S&P 500), or they may be a specialized segment of a stock exchange, such as technology stocks (NASDAQ).
What factors affect the price of a stock market index?
Index prices can be affected by a number of factors, including:
01. Company financial results
A company's earnings and losses will affect the price of its stock, which in turn will affect the price of the index. For a weighted average index, the performance of the largest component will have more influence.
02. Political News
Elections, wars, referendums and any major political events will also affect the pricing of the index.
03. Company Announcements
Changes in company leadership or possible mergers and acquisitions may affect the price of the stock, which may have a positive or negative impact on the price of the index.
04. Changes in Index Composition
When companies are added or removed, the price of the weighted index may change as traders adjust their positions to the new composition.
05. Commodity Prices
Any fluctuation in the price of commodities will also affect the price of the index. For example, 15% of the stocks listed in the FTSE 100 are commodity stocks, which means that any fluctuations in the commodity market can affect the price of the index. Investor sentiment, central bank announcements, payroll reports or other economic events can also cause the index price to rise or fall.