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Welcome to another trading lesson! Today we'll venture into the exciting realm of index trading, featuring two of today's leading stock market indices: the NASDAQ 100 and the Dow Jones (short for Dow Jones Industrial Average). You've probably heard of both of them since the beginning of your trading journey, but let's explore them in depth to find out why people all around the globe track their performance so closely.
One quick note before we start: at iFOREX, you have the opportunity to invest in CFD instruments that track the price performance of both the NASDAQ and Dow Jones.
Confused? Don't worry, we'll explain. Let's go.
There's no point in diving straight into how market indices work unless we first know what we're talking about. However, if you're already familiar with market indices, you can skip ahead.
Definition: a market index measures a particular part of the stock market, and its price is determined by the prices of several stocks contained therein. This gives investors the opportunity to invest in a collection of instruments (or a basket, if you need a visual). For example, rather than choosing one or two companies to invest in, such as Apple or Google, choosing an index would allow you to invest in a few shares at a time, thereby investing in a portion of the market.
There are even some indices that measure the performance of a particular industry, a country's economy, and even investor sentiment.
Wait: have you had a chance to read about index trading? If not, what better time than now?
As one of the most popular market indices in the world, the Dow Jones goes by many names. It's full name is the Dow Jones Industrial Average, but it's also commonly called the Dow Jones, Dow 30, DJIA, or just the Dow. Chances are you've heard all of them during a single financial news broadcast, as traders from all over the world frequently check in to see how the Dow Jones is performing.
The name comes from Charles Dow, an editor of the Wall Street Journal who first established his namesake index back on May 26th, 1896. However, the Dow Jones Industrial Average is only the second oldest index in the US. The first, also created by Charles Dow, was the Dow Jones Transportation Average.
Just like you've no doubt heard of the Dow Jones, there's little doubt you're also quite familiar with the companies included in it, a list of 30 large, publicly-owned companies like Coca-Cola, Disney, Apple, Boeing, Nike, McDonald's, and IBM. The "industrial average" part is actually a scaled average, calculated as the sum of every component price that's then divided by a divisor, which alters when any of the component stocks experiences a stock split or dividend. Sounds confusing, we know, but rest assured you'll never have to worry about doing this calculation yourself.
The answer dates back to when it was created, as many of the companies included therein were frontrunners in the US industrialization era.
Here are a few examples of the major factors that can impact the Dow Jones index prices:
Another index? Not quite. The US 30 is a financial instrument that tracks the performance of the Dow Jones Industrial Average's futures index, which gives traders the chance to invest using CFDs while employing market leverage.
Need a quick recap of how CFDs work? No problem. Contracts for Difference allow traders to invest in the price movements of financial instruments (such as indices, shares, commodities, foreign currencies, ETFs and cryptocurrencies) without having to purchase the underlying asset. Need an example? Let's say you'd like to invest in gold CFDs. Each contract represents the price of one ounce of gold. For oil, it's the price of one barrel. And for indices like the US 30 or US Tech 100, each contract represents the current price of the index.
Still confused? Take a look at our What is CFD guide.
Almost as popular as the Dow Jones, the NASDAQ-100 is definitely one of the most prominent stock indices in the world. Let's see why.
The NASDAQ-100 is quite young when compared with the Dow Jones, created by the NASDAQ on January 31st of 1985 as a way to promote itself alongside the older New York Stock Exchange. And what's better than one new index? Two indices! One of which is the NASDAQ-100 index, consisting of companies in the technology, industrial, telecommunication, biotechnology, transportation, media, service, retail and healthcare sectors. Among companies included are Amazon, Netflix, Alphabet (Google's parent company), Tesla and Apple.
Wait, you said there were two indices created. Indeed! The second index was the NASDAQ Financial-100, which mostly includes companies in the banking and financial sector.
Fun fact: even though it's the NASDAQ-100, the number of components can fluctuate, since several of them feature multiple share classes.
The simple answer: the NASDAQ is a modified capitalization-weighted index. Now, for the explanation: all that it means is that the weight of the stocks contained in the index is based on their market capitalizations, and is subject to several regulations to moderate the influence of the larger components. This also allows larger companies such as Apple to gain a larger impact on the value of the NASDAQ.
Good question, and one with an actual simple answer. The NASDAQ composite index is the term that applies to all the companies listed on the NASDAQ stock exchange, amounting to over 3,000, while the NASDAQ-100 refers to a specific sector, with significantly less components.
Here are a few examples of the major factors that can affect the NASDAQ-100:
Just like we said above, at iFOREX you can invest in CFDs of the US Tech 100 index, which is a financial instrument that tracks the performance of the NASDAQ-100 futures index.
Two indices, both important, but with very different functions. Here are two significant differences between the two:
If you'd like to open a CFD deal on the US 30 or US Tech 100, here's how in three easy steps:
Tip: Remember to place Stop Loss and Take Profit orders that'll close your deal automatically at the levels you set, even if you're not online.
Trading index CFDs with leverage: At iFOREX, traders can use leverage to boost their trading power, but remember that leverage can also boost your risk, so practice using it.
For many traders around the world, investing in indices like the US 30 and US Tech 100 as CFDs gives them the opportunity to diversify their portfolios and gain greater exposure to various markets by investing in a 'basket' of instruments rather than single shares. Speaking of portfolio diversification, at iFOREX, you'll find over 750 instruments available to trade including indices, shares, commodities, forex, ETFs and crypto.
Join iFOREX to get an education package and start taking advantage of market opportunities.