Indices are one of the most widely traded assets in the world of binary options. In the financial markets, indices are used to measure the health of any specific financial market. So essentially, they are weighted averages of specific stock values. Stock market indices are designed to track specific sectors. For example, the NASDAQ consists of technology and biotechnology companies; giving traders a gauge of how well the technology sector is doing overall.
What Factors Affect Stock Market Indexes
There are several factors that can have an effect on the action we see in any stock market index. Below are the factors that tend to have a strong influence on indices.
- Performance Of Components – Since a stock market index is nothing more than a weighted average of several different stocks, the performance of components is one of the largest determining factors. For example, Apple holds a large market share in the NASDAQ. Therefore, if Apple's stock breaks out in a big way, chances are that we'll see the NASDAQ move in the same direction overall.
- Geopolitical Conditions – There is no doubt that war tends to have a negative effect on the stock market. Therefore, in times of tense geopolitical conditions, we tend to see declines in stock market indices. Adversely, when geopolitical conditions are calm, we tend to see growth in the markets.
- Economic Data – Investors feel most comfortable when economic conditions are positive. So, under positive economic conditions, investors put more money into the market, ultimately increasing the value of stocks and stock market indices. However, when economic conditions are poor, we tend to see declines. Therefore, binary options traders that focus on indices watch economic factors closely. Consumer spending, jobs reports, unemployment data, gross domestic product, and more are all factors that are looked at closely by those who trade stock market indices.
- News About Specific Stocks – When positive news like the release of a new product, FDA approval of a new drug, or the introduction of a strong board member happens, we tend to see increases in the values of stocks, and therefore the indices they are part of. On the other hand, when negative news surfaces, we tend to see declines.
Trading Indices with Binary Options
For beginners, figuring out how to navigate the market can be a bit difficult. However, binary options have really simplified the process. With binary options traders simply need to decide if the value of a stock market index is likely to grow or likely to fall. If they are correct, they stand to earn incredible gains. When trading index binary options, there are only a few things that the trader must keep in mind to be successful…
- Size Of Index – First off, it's easy to imagine that an index with fewer than 100 components will be affected more by a change in a single stock more so than an index with 500 components. So, when trading indices, it's important to see the total number of components before trading based on any news from a single stock.
- History Repeats Itself – Looking through history tells us that historical trends tend to repeat themselves. So, it's worth researching the history of an index before making predictions of the future.
- How News Moves The Market – While news moves the market, this only happens because of how investors perceive the news. Therefore, what you may consider as big news may not be big news to investors overall, and may not cause a change in the index. Also, it's not uncommon for the value of an index to fall after news that is seemingly positive. Ultimately, price movements in the market depend how investors see the news that was released overall.
- Look Into The Health Of The Market – As mentioned above, stock market indices measure the health of a specific sector of the market. So, in order to make predictions with regard to an index that tracks transportation stocks, you'll need to do your research to learn about the health of the transportation market overall.
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Why Trade Index Binary Options Instead Of The Indices Themselves?
This is one of the most commonly asked question, and the answer is simple…binary options are the better option with regard to accessibility and reward. The bottom line is that if you want to trade indices in the traditional sense, you'll need to hire a broker and deposit thousands of dollars. Over time, you'll have the opportunity to realize minimal gains. However in the world of binary options, accounts can be opened with relatively small amounts of money. As a matter of fact, trades can be purchased at as low as $25. Not to mention, the rewards in binary options are some of the highest among all of the world's investment vehicles; known to be as high as 80%. All in all, if you plan on starting with less than a few thousand dollars and want to see high returns, binary options are the way to go!