Why Watch Market Indexes?

You cannot directly trade stock indexes, but you should still keep your eye on them. So, what is the advantage of it? Well first let us look at what an index actually is.

An index tracks the market, for example the S&P 500 tracks the 500 top companies in the US. However those companies do in the stock market is reflected in the Index. Other indexes will track different stocks and have different criteria.

Paying attention to these indexes especially the big three S&P, Dow, and the NASDAQ is critical to a trader. So why should you care what these indexes are doing even when you don’t invest into them?

The big reason is that they track the market. They are going to tell you where the easy money is and where the hard money is. For example, if you find stock XYZ and it is giving you a great buy signal, but the S&P is in a huge downtrend that is not a good sign.

While the stock that you are investing into may be giving you a buy signal you are going against the market. That means the odds are against you.

On the other hand if you find that stock XYZ is giving you a buy signal and the S&P is in a huge uptrend then the odds of you succeeding are greatly increased. This would be a much more likely trade to be profitable.

Trading in the same direction as the major indexes is normally a wise idea.

Some Offerings of IG Markets Vs City Index

As the business of CFD trading is subject to a country’s laws, it is thus not available in all nations as yet. IG Markets is one of the recognized market leaders in trading CFD. It worldwide presence reaches into most continents, with majority of its organizations in the European region. CityIndex also has various points of presence in Europe, Asia as well as Australia. In a bid by both to expand their coverage, they offer partnership programs whereby individuals or organizations can join together with them and leverage on one another’s capabilities in the financial world.

Trading markets for IG Markets vs City Index encompass a diverse spread. Ranging from stock indices, shares, foreign exchanges and bonds, they also trade in metals, energy supplies and commodities. City Index offers CFDs for trade by sectors whereby one focuses on the whole sector as compared to a specific company within the sector. This provides a better alternative to putting all your eggs in one basket as your risk is spread across a number of companies. Both provide the option for Exchange Traded Funds as an avenue to penetrate hard-to-access markets.

For those who are new to the world of CFD trading, each of these organizations provides its own source of reference materials to start the ball rolling. Upon registration of a new account with City Index, you have access to a starter kit which consists of a charting application for self monitoring of market trends. As you identify various markets for potential trading, you include them into your watch lists for further monitoring and tracking of their prices. Current information is also streamed from major indices to help you make informed decisions. Online tutorials on various aspects of trading are further sources of information. Since mobility and constant connectivity is essential to a serious trader, City Index provides a trading platform via mobile devices. Similar to its browser-based method, it allows the trader to go about his business hassle-free.

Getting started with IG Markets vs City Index’s offerings are similar in principle. IG Markets provides a free education program whereby one learns the basics with given examples. To get a taste of what CFD trading is about without any financial risk, the beginner is also set up with a free demonstration account and a certain amount of practice funds.

How to Beat the Market Trading the Market Index

“Buy and hold” investing strategy probably does not work so well for most investors and traders in the past 15 years. From our analysis of the S&P500 performance from end of 1997 to 2008, an investor will make -7% (yes… that is Negative 7%) return using buy-and-hold strategy compared to about 660% return (excluding dividends) or almost 20% annual return for those who trade major market trends.

As mentioned earlier, if you are to buy S&P 500 index or its equivalent on 31 Dec 1997 when the index is at about 970 and hold it till 31 Dec 2008, when the index is at about 903, your return will be a rather horrendous -7%!

However, assuming if you are to carry out the following trades during this period, $10,000 invested in S&P 500 will turn into $66,350, multiplying your money more than 6.6 times or equivalent to 18.8% per annum! Instead of having your $10,000 become $9,400 by just employing “buy-and-hold” strategy, you will have your $10,000 turn into $66,350, thanks to the effects of compounding! Of course, we do not expect you to be able to time the top and bottom so accurately, but if you master value trend trading, you will definitely perform better than just holding to your S&P 500 in this case.

You might think 18.8% is not much but if you include dividends of say 1.2% on conservative basis as you will not get dividends when you short the index, you are looking at 20% return per annum. If you compound $66,350 at 20% for another 20 years, your money will grow to $2,543,700! Yes, it is more than $2.5 million from initial capital of only $10,000! That is 250 times your initial capital! A record that even Warren Buffet will be proud of as his track record stands at about 21% to 24% per annum, depending on which year you measure his record.

If you are more enterprising investor, you can achieve higher returns by picking stocks that perform best in the index or sector. However, we caution being too greedy and taking too much risks. As you can see from the example with S&P 500 above, if you can achieve an average of 20% return per year, you will make a lot of money with time. You do not need to make 100% every year which is impossible for almost anyone to achieve consistently else that person will be richer than not only close to 10 times richer than the richest man on earth as he would be worth $335 billion with only initial capital of $10,000.

Contrary to popular belief, Warren Buffet does not buy and hold many of his investments. In fact, Buffet is perhaps one of the most sophisticated securities traders in the world, for example he practices arbitrage. The reason he held a large part of his investments for a long time is because he hold huge stakes in these companies that cannot be simply traded in the markets like most of us do.