You may believe that a new kind of pharmaceutical drug is certain to take the market by storm, but when it comes to the particular company out there that’s making it, you’re less sure about how things will turn out. It is therefore heartening to know that you can expose your funds to the biotechnology sector in general, without having to research the fundamentals of each drug company, through making use of a market index. A biotech index would track the performance of the industry as a whole – something that’s very useful as, on the one hand, it can focus your funds in precisely the direction you want them to go and, on the other, it can save you the risk of pegging your hopes on a single industry participant.
Indices can also be used to reflect the movements of the stock market as a whole, and the famous examples of this are the S&P 500 index and the Dow Jones Industrial Average. Generally, an index is the tool that people created to monitor the price changes in a chosen basket of securities. That basket can be expanded or whittled down to fit in with people’s needs. Indices also make for very handy benchmarks by which to gauge the success of a trading strategy or stock portfolio. The more that a strategy outperforms the overall market, as represented by, say, the S&P 500 index, the higher degree of success it can claim for itself.
You can’t park your money in an index, however, which is why we have index funds. Their job is simple: following the fluctuations of a benchmark index such as the Nasdaq 100 or the S&P. As you don’t need a genius to do this job, there’s no active manager hired to do it and the strategy is essentially passive. But what are ETFs, and why are they so popular? And what else can market indices be used for? Take a seat with the iFOREX team and we’ll give you the lowdown.
Some indices don’t give equal weighting to each of the stocks making them up. The Dow Jones Industrial Average, for instance, is price-weighted, which means that it allots more significance to higher-priced stocks than the rest. The S&P 500 goes by market capitalisation: companies with the higher market caps get the VIP seats.
Clients of the iFOREX trading platform can open CFD deals on the price movements of various major indices from around the world. Some of the indices available include the Germany 40, Europe 50, Italy 40, South Africa 40, and India’s Nifty 50. All these indices track national economies through focusing on their largest companies. On the iFOREX platform, ‘buy’ deals are used for going long on an index, while ‘sell’ deals allow you to go short. As we mentioned, though, it’s not on the index itself that you are opening your deal, but rather on a fund that tracks the index’s movements.
ETFs (exchange-traded funds) are a type of index fund, but what makes them niftier than mutual funds is the fact that you can trade them like equities on the stock market. ETF prices rise and fall throughout the day like stock prices, and you can buy them in the same way that you would buy any other shares. By contrast, you’re only allowed a small window of time at the end of the day to purchase mutual funds. And, again like stocks, you can choose to open both long and short positions on ETFs. Take, for example, Scion Asset Management’s decision, in Q3 2023, to short the semiconductor sector, which was done by means of an ETF that tracks the industry.
When you trade in ETFs with iFOREX in CFD form, you can choose from an extensive list of ETFs with various specialties. Examples include US Biotech, Metaverse, US Healthcare, Airline Industry and US Semiconductors. Looking back to the start of 2021, when COVID-19 vaccines were emerging, analysts understandably viewed the biotech industry with great enthusiasm. This would have been a favourable time, for instance, to go long on the biotech sector, and the same could be said of the AI sector at the start of 2023.
Using ETFs to access stock indices or industry-specific stocks has proven extremely popular and the reasons are clear. The liquidity of the ETF market makes it straightforward to sell whenever you want to. You can diversify your funds’ exposure over the broader market, or over a specific group of industries, and you enjoy the same conveniences as when trading stocks, in terms of when you may trade, and the deal types you may opt for.
Choosing iFOREX as your ground control for ETF and index trading makes a lot of sense because it has been a dominant name in the business for over 25 years. Visit the iFOREX website to find out why users are so pleased with the one-of-a-kind iFOREX platform.
