Index benchmarks: levels, funds and contracts

Lesson 1 · 8 min

What a stock market index is

An equity index is a published benchmark. A provider defines the constituents, how they are weighted, when the list is reconstituted, and whether the series is a price return or a total return that reinvests dividends. S&P 500, Nasdaq-100, FTSE 100 and DAX are names of well-known series. This page does not state their current levels or the weight of any real company. Those figures belong to the provider’s methodology and its latest notice.

Many headline indices weight by free-float market capitalisation: larger investable companies move the level more. A price-weighted series, by contrast, gives more influence to a higher share price, which is a different idea. The explorer below uses three hypothetical companies so the arithmetic is visible. Company values of 600, 300 and 100 produce weights of 60%, 30% and 10%. Change the values and the weights, the largest constituent and a weighted move all update. The companies are not members of a real index.

Index markets describes how this site treats benchmarks.

Lesson 2 · 7 min

Price return and total return

A price-return series follows the prices in its rules. Dividends paid by the companies are not added back. A total-return series reinvests those dividends according to the methodology, so the same companies can produce a different level. Neither series is a security. You cannot transfer “the index” to another broker. You can hold a fund or a derivative that refers to one of the series.

Comparing a fund with the wrong series makes the tracking look better or worse than the methodology allows. Read which series the fund names. This page does not print a dividend yield for a real index, and it does not treat a higher total-return level as a return you received.

Lesson 3 · 9 min

Index, ETF, future, CFD and option

Sharing a name does not make these the same holding. The cash index is the calculation. An ETF is a fund or a security with an investment objective; its market price can differ from the value of its assets. An index future is a listed contract with a multiplier, an expiry and margin at a clearing house. An index CFD is a contract with a provider, priced and financed on that provider’s terms. An index option is a right or an obligation with a strike and an expiry; the payoff is not a straight line, and the premium before expiry is not the expiration sketch.

They are not interchangeable. A futures margin deposit is collateral, not the most you can lose. A CFD exposes you to the provider as well as to the price. This comparison does not print an exchange multiplier. Where a real contract is used, read that exchange’s specification.

ETF guide · Futures trading · Options trading

The futures margin and options payoff calculators use terms you type. Those full calculator routes are not in the public directory. The academies above use the same studies.

Lesson 4 · 7 min

The index currency and your account

An index level is expressed in the currency of its methodology. A move from a hypothetical 1,000 to 1,010 is a 1% move in that level. If the account is in another currency, the account result also depends on the exchange rate between those currencies. This page does not supply that rate. The forex lessons do, when you type it.

A fund can be hedged, unhedged, or listed in a different currency from the index it names. The share price, the currency of the listing and the index currency are three facts. Leaving one of them out does not make the result equal the index move. Forex is the separate course for the pair itself.

Lesson 5 · 7 min

News and an index level

A release still has an actual figure and an expected figure. The surprise is the difference. Equity indices can respond to earnings and to the discount rate, and those two effects can point different ways. A currency pair can respond to the same print for a different reason. The index page does not borrow the currency’s conclusion.

A strong headline does not dictate the next level. The result may already have been anticipated, or another release may dominate the same hour. The explorer is arithmetic on figures you type. It does not load a calendar and it does not forecast an index.

Lesson 6 · 8 min

A hypothetical index plan

Name the product first. An ETF plan uses a share quantity. A futures-style plan uses a contract count and a multiplier you looked up. The cash index itself is not a quantity you can enter. The stop is a price on that product, and the result if filled there is entry to stop, times quantity, times the multiplier, in the price currency. Convert it only when you type a rate.

A gap can pass the stop. Related index products can fall together. Finishing the form is not a recommendation and not an order.

Knowledge check

Questions on the benchmark, the weights and the product. The count is not stored.

Learn, calculate, review

• Position sizeA cash risk budget divided by the distance to a stop.
• Profit and lossA hypothetical result from entry, exit, quantity and a multiplier you type.
• Risk and rewardA ratio from distances you type. Not a probability.
• Trading journalA record that stays under your own privacy choices.
• Trading performanceA reading of records you already keep. Not a forecast.
• ETF guideThe fund is a security. The index it names is still a calculation.

Related reading

• ETF guide
• Liquidity
• Stocks and shares
• Index markets
• Futures trading academy
• Options trading academy