The Working Mechanism of Index Trade…!!

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The working mechanism of Index Trade

Trading is one of the most thankless jobs in the world. It requires a usual combination of emotional resilience and mental flexibility. Any type of trading requires proper strategies and quick action to relevant information. An intelligent trader doesn’t need to be right all the time but remains vigilant about market moves. The rules of the games are always changing, trends change, volatility changes and the historical data which one man relies on ages to build a strategy may fail next moment. So, before you dive into stock trading arena, it’s really important to know about various types of trading in India stock market:  

  • Intraday trading: Intraday means buying and selling of the stocks on the same day. The intraday trade can be either on the long side or on the short side. The intraday traders book profit & loss quickly and close their trade before the closing hours of the stock market.  
  • Fundamental trading: Fundamental trading mainly focuses on long term trades. The fundamental traders believe in the ” buy and hold’’ strategy. They mainly analyze the intrinsic value of shares by carefully analyzing financial statements, earnings, growth, and management quality.  
  • Swing Trading: In this trading, the traders wish to hold stocks for more than one day to capture additional momentum in the price of stocks. They mainly try to predict short term fluctuation overnight. But for a passive investor index trading is the best. An index is a collection of stocks of various companies, which are grouped to get a clear idea about how the sector or index is doing. The stocks which mainly contribute to a sector of the economy are combined to form an index. If an index is doing well, it means that the sector is bullish and if the value of the index has fallen, it means that the sector is bearish.   

In India, there are mainly two types of Indices in the market:  

  1. S&P BSE Sensex  
  2. CNX Nifty 
  1. S&P BSE Sensex: It is an index of the Bombay stock exchange (BSE), which basically consists of 30 well established and financially sound companies.  
  2. CNX Nifty: It is an index of the National stock exchange, which basically consists of the top 50 companies influencing the market trend in the economy. 

Working or Mechanism of Index Fund:

Index funds basically work on three key strategies:  

  • Method of Index construction: In order to trade in an index fund, one needs to understand how an index is constructed. A certain parameter is constructed and based upon that stocks are selected. Once included in the index, a certain percentage of weightage is provided to it based upon its performance. It basically defines a company’s ability to regulate the index performance by that percentage. For Instance, if a company has a weightage of 9% in NIFTY 50, then it can influence the index price by that percent.   
  • Investing according to Index construction: After an index is constructed and a particular weightage is provided to it. The investment in the company shares will be given, according to the index weightage. For example- If an investor is trading in the S&P BSE Index, then he/she may invest only in the listed 30 companies.  
  • Risk Factor: Risk analysis is one of the most important things before investing in any fund. The risk of investing in an index fund is comparatively low compared to other funds. If the economy is performing well, then the index fund will perform well but in case, if the economy is not performing well.

Factor affecting Index trading: 

Trading in indices still requires an investor to understand the basics of valuation. Let’s look at the other factor affecting the index: 

  • Fundamentals of the economy such as GDP and inflation rate.  
  • Monetary policy and interest rates of the banks.  
  • Internal factors regulating the internal business of the company, such as a change in the management, the appointment of CEO or launching of a new product. 

The scale of the profit depends upon the stock index. But the more one watches the market carefully, the better one will predict it. The market rises and falls but also gives chances to make a profit. One should trust his choices and analyzing skills.  

*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing 

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