Before trading on an index, make sure to examine its component stocks; whether the index is made up of stocks from a specific market sector, or is primarily filled with firms from a particular country, knowing the kinds of stocks an index lists will give you a better idea of the factors that can cause its movement.
For example, FTSE 100 firms are those with a claim to the largest market capitalisation in the UK. Such companies represent around 80% of the wealth of the LSE – the London Stock Exchange, meaning that the FTSE 100 provides a fair representation of the current condition of the UK market in general. In addition, a tenth of the FTSE 100’s listed shares are within the mining and energy sectors. Because of this, the fluctuating prices of mining and energy commodities such as copper, iron and oil, could directly affect the values of these shares, and could therefore potentially cause movement of the index as a whole.
The number of companies that an index is comprised of can range from 30 to 5000; for example, Germany’s DAX 30 and the Wiltshire 5000 index. When choosing which index to trade, it can be worth making the number of listings in an index a factor in your decision decision. Larger indices may require a bigger-picture knowledge of the economic condition of a country or market sector, which may suit some people, whilst others may find smaller indices more suitable to trade.