Best Indices to Trade: Where to Start and What to Watch

For many new traders, the world of financial markets can feel overwhelming. With thousands of stocks, currencies, and commodities available, knowing where to start is half the challenge. That's where index trading comes in – offering a simpler, more focused way to gain exposure to markets without picking individual shares. But not all indices are created equal. Some are more liquid, some more volatile, and others simply more accessible depending on where you live or trade. So, which are the best indices to trade?

Introduction to Stock Market Indices

At its core, a stock market index is just a basket of shares grouped together to represent a particular segment of the market. Instead of tracking one company, an index reflects the performance of multiple businesses, often from a specific country or industry. For example, the FTSE 100 includes the 100 largest companies on the London Stock Exchange, while the S&P 500 covers 500 major firms listed in the United States.

Indices are used as a snapshot of how a market is doing overall. When an index rises, it usually means most of the companies within it are performing well – and when it falls, the reverse is true. This makes indices incredibly useful for traders who want to gauge market sentiment or capitalise on broader economic trends, rather than betting on individual companies.

Criteria for Selecting Indices to Trade

Now, with so many indices available, how do you know which ones are worth trading? There are a few key factors to consider.

Liquidity is a big one. This simply means how easy it is to buy and sell without affecting the price too much. Indices with high trading volumes – like the S&P 500 or the DAX 40 – tend to have tighter spreads and quicker execution, which is ideal for active traders.

Volatility is another crucial point. Some traders prefer markets that move more dramatically throughout the day, as this can offer more opportunities for profit (and risk). Indices like the NASDAQ-100 are known for their higher volatility, especially due to the tech companies they include.

You'll also want to think about market hours and accessibility. Some indices, like those in the US, trade during different hours to those in the UK or Asia. Depending on your time zone and schedule, it might be more convenient to trade indices that align with your day.

Finally, broader economic factors and geopolitical events can influence indices differently. For instance, European indices might react strongly to EU regulations, while Asian markets could be swayed by developments in China or Japan.

Top Global Indices for Trading

Across the world, certain stock indices attract more attention—and trading activity—than others. These global favourites offer a mix of liquidity, movement, and opportunity that appeals to traders of all levels.

First up is the S&P 500 in the United States. Covering 500 of the largest US companies, this index offers broad exposure to the American economy and is known for its stability and depth. It's highly liquid and widely followed, making it a favourite for traders of all levels.

Then there's the NASDAQ-100. also in the US, which is a bit more specialised. It includes 100 of the largest non-financial companies, many of them in the tech sector – think Apple, Microsoft, and Amazon. Because of its tech-heavy nature, the NASDAQ tends to be more volatile, offering sharper price swings that attract short-term traders.

Back in the UK, we have the FTSE 100. which includes major players like BP, HSBC, and Unilever. It's a solid option for those wanting to trade during UK market hours and track British economic trends. It's also highly liquid and tends to move in response to global developments, as many of the companies are multinational.

Moving over to Germany, the DAX 40 is a key index tracking 40 major companies listed on the Frankfurt Stock Exchange. With firms like Siemens and BMW, it's a good representation of Europe's largest economy. The DAX is known for being quite responsive to European news and economic data, offering both stability and opportunities.

Lastly, the Nikkei 225 in Japan gives traders a window into the Asian markets. It includes a mix of manufacturing giants and tech companies and is influenced by both domestic policy and global trade dynamics. Given the time zone difference, it's also popular among traders looking for action outside of European or US hours.

Emerging Market Indices

Beyond the well-known global indices, some traders look to emerging markets for potential growth and volatility.

The MSCI Emerging Markets Index is a diversified option, covering companies from countries like Brazil, India, and South Africa. These markets can be riskier due to political and economic instability, but they also offer the chance for higher returns. Just bear in mind that liquidity might be lower, and price swings can be more unpredictable.

In China, the Shanghai Composite Index is a go-to for those interested in the world's second-largest economy. It includes companies listed on the Shanghai Stock Exchange and is often influenced by government policy, trade relations, and domestic economic data. While it's not as easy to access as other indices, some brokers do offer exposure through ETFs or CFDs.

Strategies for Trading Indices

Trading indices isn't just about picking the right one – it's also about knowing how to trade them effectively.

Many traders use technical analysis, relying on charts and indicators to spot patterns and trends. Tools like moving averages, support and resistance levels, and RSI (Relative Strength Index) are commonly used to time entries and exits.

Others lean more on fundamental analysis, looking at economic reports, central bank decisions, and global events to predict how markets will move. For instance, a strong jobs report in the US might boost the S&P 500. while political uncertainty in Europe could weigh on the DAX.

Risk management is key, no matter your strategy. Using stop-loss orders, position sizing, and keeping emotions in check can help protect your capital, especially in volatile markets.

Finally, staying informed about global news is essential. Indices react quickly to major developments – from interest rate changes to geopolitical tensions – so keeping an eye on the headlines can give you an edge.

Trading indices offers a dynamic way to participate in the markets, with options for all experience levels. By focusing on the most active and accessible indices, and developing a solid approach to analysis and risk management, you can trade more confidently – and hopefully more successfully – in this exciting part of the trading world.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.