Indices are a measure of the price performance of a set of exchange-traded shares. The FTSE 100, for example, follows the top 100 businesses on the London Stock Exchange. Trading indices allows you to have exposure to an entire economy or sector at once while just opening one trade.

The market capitalization of the constituent firms is used to create the majority of stock market indexes. This strategy offers larger cap firms a higher weighting, which implies their performance has a greater impact on an index’s value than smaller cap companies.

Several famous indexes, such as the Dow Jones Industrial Average (DJIA), are price-weighted. This strategy offers more weight to firms with higher share prices, which means that changes in their values have a bigger impact on an index’s current price.