Connect with us

Hi, what are you looking for?

Editor’s Pick

What are the differences between trading indices and stocks?

In many respects, trading stocks and trading indices are very similar. The trader wants to buy the stock or the index for a low price and later sell it for a higher one.

While the basic profit principle is the same, there are a few differences between trading stocks and indices of which market participants should be aware. This article will explain them.

What are stocks and indices?

Stocks are financial instruments that represent fractionalized ownership of a corporation. If an investor owns 1% of a company’s stock, they own 1% of the company. Companies issue stocks to raise funds to run their business operations. Stocks are sometimes known as equities and entitle their holder to a share of the issuing company’s profits.

Indices group individual stocks together. Examples of indices include the S&P 500 and the FTSE 100. The former index tracks the prices of the 500 top-performing companies in the United States.

The three most widely followed indexes in the U.S. are the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite.

The latter tracks the prices of the 100 top-performing companies listed on the London Stock Exchange.

Indices like those mentioned are known as benchmark indices and include company stocks that are performing well based on predefined criteria. Other types might focus on a specific market sector, such as tech or health care, or they might include companies based on their market capitalizations.

Stocks trade on stock markets like the London or New York Stock Exchange. Meanwhile, indices trade at brokerages, such as Individual stocks often trade on broker platforms, too. The difference between the two trading venues is that asset prices come from an exchange and a brokerage simply references these prices.

Trading stocks and trading indices: What’s the difference?

Beyond where price discovery occurs, there are other key differences between stocks and indices of which traders should be aware. The main one is relative volatility.

When investing in an individual stock, the fortunes of that single company determine the price. If the company announcesmassive, unexpected earnings over a quarter, you can expect to see the stock price rise dramatically. Conversely, if something negative happens to the company, you will often see a sharp decline in the stock price.

Since an index comprises many different stocks, volatility is less extreme. Suppose one company in the S&P500 sees a sudden 50% drop in its stock price. The index will not fall by 50 percent because its price is an average of 500 company stocks. While this reduced volatility protects traders from sudden price drops, it also means the potential upside is limited.

Reduced volatility also means that an index trader does not need to monitor their positions as closely as a stock trader. Markets usually trend in a direction and providing the trend is upward, an index price should also increase.

Diversification is a less involved process, too. A stock trader will have to select the stocks to which they want exposure whereas an index is already formed, requiring less research on the trader’s behalf.

Your information is secure and your privacy is protected. By opting in you agree to receive emails from us. Remember that you can opt-out any time, we hate spam too!



Linesmen fix electric posts in Tondo, Manila. — PHILIPPINE STAR/ RUSSELL PALMA PRESIDENT Ferdinand R. Marcos, Jr. is hoping the Court of Appeals (CA)...


Finance Secretary Benjamin E. Diokno answers questions from the media during a press briefing at the New Executive Building, Malacañan Palace, July 6. —...


SUBSIDIES extended to government-owned and -controlled corporations (GOCCs) surged to P39.981 billion in October, the Bureau of the Treasury (BTr) said. Budgetary support to...


Manila rose six spots to 55th place out of 75 ranked centers in the sixth edition of the Smart Centers Index (SCI) by Long...


By Arjay L. Balinbin, Senior Reporter METRO Pacific Tollways Corp. (MPTC) said its unit NLEX Corp. expects to award the Candaba Third Viaduct project,...


1 of 3 ARMANI’s diffusion line, Armani Exchange, is trading in its old store look for a new one. During a short introduction to...

You May Also Like


BW FILE PHOTO GROSS BORROWINGS by the National Government reached P2.6 trillion as of end-September as it continued to raise funds to respond to...


KARASOLAR.COM TENA, Ecuador — Ecuador’s rainforest Achuar people say their ancestors long dreamed of a “fire canoe” or “electric fish” that would let them...


REUTERS By Luz Wendy T. Noble, Reporter The country’s foreign exchange buffers slightly increased as of end-October as the value of the central bank’s...


COVID-19 has had a significant impact on the mental health of Filipinos across different groups all over the archipelago. From frontline workers, parents balancing...

Disclaimer: Respect, its managers, its employees, and assigns (collectively "The Company") do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

Copyright © 2022 Respect Investment. All Rights Reserved.