US indices

Explained for new traders

Scroll Down

DEFINITION

US indices

US indices is a collective term for the various US stock market indexes. An index simply refers to a group of stocks, with US ones making up a large proportion of the overall financial value of the US stock market. This means that when you look at a US index, you get some idea of how the American stock market is performing as a whole.

As well as providing useful data to investors and economic analysts, US indices can actually be traded themselves. You’ve probably already heard of at least one of the country’s most widely-followed indexes: the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite. Trading one of these basically means you’re speculating on whether the value of an index will go up or down.

Example

  • Say you’re trading the S&P 500, which comprises 500 of the top US companies. Its value depends on the overall performance of all the stocks. If you correctly speculate on the direction of the S&P’s future price movements, you will profit. Equally, you’ll suffer losses if you get it wrong.

Trade Nation is definitely the place to be if you’re interested in trading US indices. We offer the lowest trading costs so you won’t find a better value platform for trading the S&P or the Dow.

Should you start trading US indices?

Trading is never risk-free and you’ll end up experiencing both profits and losses once you get going — that’s what makes it so exciting.

The risk is spread across a large number of stocks in diverse companies and industries, meaning you’re unlikely to suffer much if a couple don’t perform the way you’d expect. Of course, there are exceptions. For example, some strategists thought Tesla would bring volatility to the S&P when it entered the index in December 2020, with one comparing it to a wild fish in a big pond. However, that hasn’t been the case so far. Tesla lost 40% of its value between the 25th of January and 5th of March this year. Over the same period, the S&P was down 13 points, or 0.3% — barely a day’s movement. As such, this shows that when trading US indices, you aren’t exposed to the risks facing a specific company, making it arguably safer than trading individual stocks.

NEW TRADERS

US indices are a popular, accessible way to trade the US markets

US indices offer an accessible, cost-effective way for beginners to get involved in the exciting and volatile world of the US markets, which present plenty of fascinating trading opportunities. As well as being less risky and expensive than trading individual stocks, indices can be a good starting point because of the sheer amount of information out there. There are so many resources available, making it easy for you to teach yourself about what US indices are made up of, what influences them, and how they compare to each other.

You can trade US indices using a leveraged product, such as CFDs or a spread trade. With these you only need to put up a small percentage of the trade’s full amount (though remember profits and losses are based on the trade’s total value, so leveraged products are risky).

These products also have a spread — the difference between the sell and buy prices — which is a major component of your trading costs. The narrower the spread, the cheaper it is to trade. And you won’t find better spreads than here at Trade Nation. Some people may use CFDs to trade US indices, but we recommend spread trading as it’s easier to understand and you’ll be able to better manage the risks. Profits and losses can also be made in the currency of your choice.

Pros and cons of trading US indices

Just like every other market out there, US indices have their own unique pros and cons. Weigh these up to decide whether this market is suitable for your trading style:

PROS

A company can go bust and cost you your investment, but a stock index can't.

Any stocks that do go bankrupt are simply replaced with others, leaving most of your investment intact.

Diversification is key to risk management.

When you trade the larger US indices, you aren’t putting all your eggs in one basket. An index is made up of lots of stocks from different companies and industries. Larger US indices can also have very low trading costs. Trade Nation has the narrowest, fixed spreads for the US 500 (0.14) and the Dow (1.0).

It's hard to manipulate US indices because they can't be bought or sold as such.

As the value is determined by the price of all its stocks, it’s not like a sudden rally behind one particular stock will cause the whole index to increase.

CONS

Indices with a smaller amount of shares can be very volatile.

For example, the Dow only has stocks from 30 companies, so the index may be greatly influenced by large companies which have a significant weighting.

Brokers may charge higher fees if you want to trade less liquid US indices.

They often also have higher margin requirements, meaning you’ll need more money in your account to open a position.

Some stock indices are less liquid than other markets.

This means it make take longer to buy or sell, and therefore turn your trade into cash.

Pros and cons of trading US indices

Just like every other market out there, US indices have their own unique pros and cons. Weigh these up to decide whether this market is suitable for your trading style:

PROS

CONS

A company can go bust and cost you your investment, but a stock index can't.

Any stocks that do go bankrupt are simply replaced with others, leaving most of your investment intact.

Indices with a smaller amount of shares can be very volatile.

For example, the Dow only has stocks from 30 companies, so the index may be greatly influenced by large companies which have a significant weighting.

Diversification is key to risk management.

When you trade the larger US indices, you aren’t putting all your eggs in one basket. An index is made up of lots of stocks from different companies and industries. Larger US indices can also have very low trading costs. Trade Nation has the narrowest, fixed spreads for the US 500 (0.14) and the Dow (1.0).

Brokers may charge higher fees if you want to trade less liquid US indices.

They often also have higher margin requirements, meaning you’ll need more money in your account to open a position.

It's hard to manipulate US indices because they can't be bought or sold as such.

As the value is determined by the price of all its stocks, it’s not like a sudden rally behind one particular stock will cause the whole index to increase.

Some stock indices are less liquid than other markets.

This means it make take longer to buy or sell, and therefore turn your trade into cash.

Market-weighted vs price-weighted indices

  • Market weighted: The bigger the company in terms of its market capitalisation, the bigger difference it will make to the index. For example, Apple’s share movements will have the greatest impact because it’s such a huge company.

  • Price weighted: The higher the share price, the bigger difference it will make to the index. Large companies don’t necessarily always have the highest share price as this depends on the number of shares in circulation (Apple has split its stock several times to bring the price down and make them more tradable).

Why does this matter?

While it’s commonly believed that an index reflects a country’s economy, this isn’t necessarily true. For example, an index heavily weighted towards a few of the largest US companies isn’t going to reveal much about the rest of the stock market. Therefore, to trade US indices, you need to understand exactly what an index is made up of and what influences its price movements,

The three most popular US indices

  • S&P 500: Made up of the top 500 US companies and representing about 80% of the US stock market’s total value. This is a market-weighted index, so the biggest companies have the most influence on its price movements.

  • THE DOW (AKA WALL STREET 30): Made up of the 30 largest and most influential US companies, reflecting the prestigious blue-chip’ market rather than the broader economy. If the Dow falls, that doesn’t mean the whole market has fallen to the same degree. As a price-weighted index, this means small changes in larger stocks will make more of a difference than large changes in smaller stocks.

  • NASDAQ COMPOSITE (AKA TECH 100): Made up of the 100 largest stocks by market capitalisation traded on the Nasdaq stock exchange. These are predominantly tech stocks, though the index does include other sectors, as well as speculative companies with uncertain returns. Like the S&P, Nasdaq is a market-weighted index. However, it is far more overexposed to the biggest companies.

Trading US indices vs forex trading

Aside from US indices, many beginner traders are attracted to forex trading. This involves speculating on the price movements of currency pairs and is one of the widest-known and popular markets.

There are some key differences between US indices and forex so the best option for you will depend on your personal trading style.

  • As we’ve already mentioned, US indices are considered relatively secure as an index is made up of a diverse range of stocks. You can also make longer-term trades and form predictions based on broad market movements.

  • In forex, currencies are traded in pairs, with one currency fluctuating up or down relative to another. These pairs can prove to be very volatile, particularly those pairs that include the currency of a country with a small economy. Some traders like this as it’s possible to profit very quickly, but you need to remember that losses can accumulate just as fast.

It’s also important to think about the differences between the assets being traded. US indices are sure to excite someone keen to engage with the American economy, while forex is better suited to someone wanting to explore the relationships between different currencies. Our top tip for beginner traders? Make sure you choose a market that matches your interests.

OUR PLATFORM

Why trade US indices with Trade Nation?

Here at Trade Nation, we’ve created a community to educate and support beginners as they start their trading journey. If you want to start trading US indices, you’ve found the perfect place to do so.

Use our practice platform to test out strategies without risking any of your own money, and sign up for a live account to access all the extra features, including our trading signals and SmartNews customisable newsfeed. There’s no minimum deposit required to open a live account either.

The Trade Nation platform offers the best rates for trading US indices

Our fixed spreads mean your trading costs will stay low the same no matter what happens in the markets. In fact, Trade Nation offers the best rates in the market for speculating on both the S&P and the Dow, with spreads of 0.14 and 1.0 respectively during the main trading session. This is when the market is most liquid (2.30pm to 9pm). We also have an excellent customer support team available to help you out 24 hours a day, Monday to Friday.

Join our nation of traders

Financial spread trading comes with a high risk of losing money rapidly due to leverage. You should consider whether you understand how spread trading works and whether you can afford to take the high risk of losing your money.