Index (pl. Indices/Indexes)

Index (pl. Indices/Indexes): The measurement of a group of assets (usually a group of shares traded on a specific exchange), economic performance indicators or services that enables gauging their performance. Indexes cannot be invested in; however, there are funds and exchange-traded funds (ETFs) that track these indexes, which CAN be invested in.

Calculating Price Movements When Trading Indexes

Trading Indexes - text

Stock indices move in ticks. A tick is defined as the smallest price movement of an instrument, in other words the minimum increment in which the price can change.

Each index will have its own way of moving.

The S&P and NASDAQ have tick moves of 0.25, the three European indices have tick moves of 0.50 and the Dow Jones moves in increments of 1.00.

So taking the S&P500, if it moves from 1,650.00 to 1,650.25, we say that is a move of one tick. However in the case of the Dow Jones if it moves from 14,700.00 to 14,701.00 that is considered a movement of one tick too.

Stock indices’ movements are also often measured in points as well as ticks. Points are mentioned more often on news bulletins and reports when referring to stock indices like the Dow Jones or S&P.

A point is a price movement that occurs when we see the number before the decimal point change up or down by one.

So if the S&P500 increases from 1650.00 to 1651.00 this is an upward move of one point. This one point was made up of four ticks as the S&P moves in 0.25 tick moves.

We sometimes say the Dow Jones moves in ticks but it can also be called a point. They are the same thing in this case. The Dow Jones futures only move in points as the figure is so large.

Each index has its own currency. Obviously the American indices use the US Dollar, the FTSE uses the British Pound, the European indices use the Euro and the Nikkei uses the Yen.

So to calculate the value of a tick move we simply multiply our position size by one tick:

So let’s take the Dow Jones as our first example. The minimum trade size for each stock index is 1 index. So if we believe the Dow is going to increase in value and we want to open the minimum size then:

1 index * 1.00 (tick) = $1.00

So every time the Dow moves one tick (or one point) we will gain or lose a US dollar. If we have a Euro trading account our profit or loss will automatically be calculated at the current EUR/USD exchange rate.

Let’s take another example using the FTSE 100 this time. Say we wanted to short sell 5 FTSE indexes. Our calculation will be as follows:

5 indexes * 0.50 (tick) = £2.50

So every time the FTSE moves 0.50 we will gain or lose £2.50 as we bought 5 indexes. So say the FTSE moved from 6,400.00 to 6,300.00 we would make £500.

Of course if we have a Euro or US Dollar platform our profit is converted at the current exchange rates and that is what we would see in our account.

Let’s look at a final example using the NIKKEI 225. So let’s say we want to buy 200 indexes of the Nikkei then our calculation would be as follows:

200 indexes * 5.00 (tick) = ¥ 1,000

So in this case every time the Nikkei moves a tick (5.00) we will gain or lose ¥ 1,000. Of course this ¥ 1,000 will be automatically converted to the Euro, US Dollar or British Pound exchange rates.

Some indices will have a minimum trade size based on their value. For example the Nikkei has a minimum trade size of 100 indexes as the value of the Nikkei is measured in Yen and if we were to buy just 1 index it would be too small a trade. For the other indices we mentioned the minimum trade size is just 1 index.