Indices allow investors to gain an insight into the performance of an asset class or a segment of that asset class. Indices are used as the underlying for various financial instruments and to benchmark the performance of portfolios designed to replicate the performance of a given asset class.
Types of indices
There are six broad types of indices:
- Capitalisation indices
- Fixed income indices
- Residential property indices
- Sector indices
- Strategy indices
- Volatility indices
Benefits of trading index based instruments
Index based instruments enable you to gain exposure to the breadth of instruments making up the index in one transaction. The alternative would be to buy each and every instrument in the index in the correct proportion. Some instruments have features that allow you to gain leveraged exposure to an index or exposure with a specific risk profile. Some instruments also allow you to “short” the index and profit from a downward move in the value of a specific index. This is of benefit to investors with a bearish view on an index or investors with an existing portfolio that tracks the index and they require a means of hedging the portfolio against an adverse movement in prices.
Key features of indices
Indices are designed to be broad measures of performance of an asset class or a subset of that asset class. So that indices are widely adopted, the methodology used to create an index is often published to give stakeholders an understanding of how decisions governing index calculation are made. Also, indices are sometimes designed to be investable. This means that constituent securities must be relatively easily tradeable so that index tracking portfolios can be created.
How to trade
There are warrants, exchange traded funds, CFDs, futures and options over certain indices. These instruments can be used to gain exposure to the performance of the index, provide leveraged exposure to movements in the index, or hedge portfolios against losses. The ASX find a broker tool can help investors find a broker who can facilitate trading ASX products over certain indices.