What are Stock Indices?
Stock indices display how a portion of the stock market is performing and can be used to analyze industries, market sectors, and potential trades. Traders cannot trade the indices directly, but they can trade futures and options based on the stock index, known as derivatives markets. Futures and options markets often move in tandem with their underlying indices, which is why many traders prefer to chart the index rather than the temporary options markets.
Futures and Options Markets
When we hear a trader mention they are long on the NASDAQ 100 index or short on the S&P 500 index, they are not technically long or short on the NASDAQ 100 or S&P 500 indices. Rather, they are long or short on the futures market or options market, such as the NQ futures market or the SPXW options market. Futures and options based on stock indices are referred to as derivatives markets because they are derived from the underlying stock index. The value of a futures or options contract depends on the movement of the underlying index it tracks. There are futures and options markets available for all popular stock indices. Futures and options contracts on stock indices are among the most popular markets among short-term and long-term traders.
Charting
Futures and options markets typically move in sync with their underlying stock indices. For example, when the CAC 40 stock index falls, the CAC 40 futures market typically drops by roughly the same amount. Therefore, it is possible to chart stock indices while trading futures and options markets. However, futures contracts can also be charted and analyzed.
There are some advantages to charting stock indices instead of futures and options markets. For example, stock indices are continuous markets, not expiring like futures and options contracts. This means traders do not need to update their charting software to a new contract every three months (or monthly, depending on the relevant market). Options markets are difficult to chart because they consist of many active contracts (at various prices). Instead, it allows traders to chart stock indices to analyze multiple options contracts using one chart.
If you decide to chart stock indices instead of futures and options markets, note that you still need to update your trading software (your order entry software) to use the appropriate futures or options contract when trading. Otherwise, you might find yourself trying to trade an expired contract and wondering why it doesn’t work.
Most charting software has a box where you enter the symbol you want to chart. If you start typing the name of the index, the index and any related futures or options contracts will likely appear in a dropdown list. Start typing “S&P 500,” and you may see SPX, a commonly traded symbol on most charting platforms for the S&P 500 index (shown in this chart, along with S&P 500 E-Mini futures contracts). You may also see various futures or options products, and you can select them from the list to see a chart for those products.
TradingView.com is a free charting site that provides charts for indices and futures, along with other products. Type in the name of the index and then select whether you want to view indices or futures from the dropdown list.
Conclusion
Stock indices are a popular trading vehicle, but they cannot be traded directly. An index is merely a collection of stocks (or other assets) that move based on the stocks within it. Traders can analyze both the index and the futures/options contract they wish to trade. Indices do not expire, but futures and options contracts do, so traders need to ensure they are trading the appropriate contract.
Source:
https://www.thebalancemoney.com/trading-stock-indexes-1031061
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