Index trading: What are the key factors to consider?

OANDA
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Index trading: What are the key factors to consider?

by Craig Erlam

Index trading — taking a position on stock indices — allows investors to speculate on the price movements of particular exchanges around the world. There is, of course, no foolproof method to predicting how markets will move, but understanding the key factors around trading indices is an important foundation. As Benjamin Franklin once said, “An investment in knowledge pays the best interest.”

Here are three key issues to consider when trading indices:

Research the composition and weightings of the index

Stock market indices each have their own criteria and approach to determining constituent stocks, and typically use a method of weighting to calculate their value. Common methods of index weighting include equal-weighting, market-cap weighting, and price weighting — each of which will have a different impact on the way the respective index performs.

Depending on the construction of an index, it can provide a snapshot of a particular industry. For example, the Dow Jones Industrial Average — perhaps unsurprisingly given its full name — was historically renowned for being heavily comprised of industrial companies. Today, the Dow Jones includes a wide range of industries, but the NASDAQ 100, for example, skews heavily toward the technology industry, while the France 40 lists a high number of luxury brands. Additionally, geographical exposure can vary: while the FTSE 100 is a UK index, a large majority of its revenue is generated outside of the UK, giving a far more global exposure.

Consider the potential impact of market-moving events

By their nature, indices can be susceptible to volatility. As trackers of entire markets and sectors, indices are impacted by a wide range of factors including economic news, geopolitical events and company announcements.

For example, prior to the recent rises in interest rates across the globe, the NASDAQ 100 had been outperforming compared to the Dow Jones and the S&P 500, as many US technology firms were experiencing high growth. However, when interest rates began to rise, many of those same highly-leveraged technology firms saw their value decline — resulting in a negative impact on the NASDAQ as a whole. Meanwhile, changes in the global energy markets stemming from the Russian invasion of Ukraine meant that at one point, oil and gas firms were performing extremely well as the price of a barrel of oil soared, which was reflected in indices with a high composition of energy firms.

Assess whether indices trading is a good fit for your goals

One of the biggest benefits of trading indices is the breadth of market exposure that you can gain from a single position. That can be particularly beneficial for less experienced traders, as indices offer an opportunity to quickly get exposure to markets without having to engage in the high levels of research often needed to invest in single stocks. That’s not to say that index trading is just for beginners, though — trading indices can be part of a diversification strategy with the goal of balancing risk. Using CFDs, you can go long as well as short, which can allow you to hedge against longer-term investments. You could, for example, short an index that is heavily weighted toward a particular industry while simultaneously being long on an individual stock within that same industry, so that you’re hedging yourself against the market as a whole.

Index trading may also be attractive to those looking for shorter-term opportunities, as it is an immediate way of speculating on the price movements of a total market and does not necessarily require long-term investment. Additionally, trading indices allows you to use leverage to control a larger position with a relatively smaller amount of trading capital.

Ultimately, while trading indices allows investors to take a position without having to conduct deep research into individual assets, there are a number of factors that need to be considered and understood first.

Click to find out more about trading indices with OANDA.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

76.6% of retail investor accounts lose money when trading CFDs with this provider.

You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

About OANDA

A trusted, regulated broker, OANDA offers competitive spreads on a wide range of CFD markets, including indices, forex, commodities, metals and bonds.

Voted “Most Popular Broker” by TradingView three years in a row in 2022, 2021, and 2020, OANDA is the broker of choice for traders who want a smarter way to trade.

Established in 1996, OANDA has affiliates in the world’s most active financial markets, including London, New York, Toronto, Singapore, Tokyo, Sydney and Warsaw.

Tepco started the second release of treated radioactive wastewater into the Pacific Ocean

Eve Katz
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Tepco started the second release of treated radioactive wastewater into the Pacific Ocean

On Thursday morning, Tokyo Electric Power Company Holdings (tepco), started the second release of nuclear wastewater into Pacific Ocean from the Fukushima Daiichi Nuclear Power Plant, igniting the pre-existing tension with its neighbours, including China.

Over the period of 17 days, about 7,800 cubic meters of diluted radioactive water will be released into the water.

The first release of 7,800 cubic meters of wastewater happened in August 2023, triggering a backlash from neighbouring countries.

China (including Hong Kong), which is one of the main buyers of Japanese sea-borne produce, has now placed a ban on all seafood imports, in a move that is likely to hurt the Japanese economy.

On Thursday, fishermen and other locals in South Korea hit the streets in protest.

Protests also broke out in the neighbouring countries at the time of the first treated radioactive water release in August.

Nonetheless, in July, just before the first treated water release, the UN nuclear watchdog approved the plan, stating that the impact on water, sea creatures and humans is going to be negligible.

In 2011 the Fukushima Daiichi Nuclear Power Plant was hit by a 9.0 magnitude earthquake and tsunami. Three of Daiichi’s nuclear reactors were flooded by seawater, marking the event the worst nuclear disaster since the infamous Chernobyl explosion. 

Over the last decade, about 1.34 million tons of radioactive water has accumulated in 1000 tanks at Daiichi, causing the power plant to be almost out of storage space.

 The plan to release treated wastewater is to be carried out over the next 30 years.

ECR Minerals shares rise as Hurricane Project rock chip samples received

UK Investor Magazine
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ECR Minerals shares rise as Hurricane Project rock chip samples received

ECR Minerals, the exploration and development company focused on gold in Australia, has received the final rock chip sample results from its Hurricane Project in North Queensland.

ECR Minerals shares rose in the immediate reaction on Thursday.

The highlights include grab samples up to 45.7 g/t gold at Hurricane North and 43.2% antimony at Holmes South, equivalent to 83.38 g/t gold grade.

In total, assays were received for 224 rock chip samples collected across the project area. This sampling aimed to test the mineralised vein systems at prospects such as Holmes, Tornado, Cyclone and Hurricane North and South.

Mapping by ECR has confirmed quartz stockwork zones up to 20m wide at the Holmes prospect. The sampling results will help determine the size and extent of these mapped visible outcrops.

“As I have said previously, the Hurricane Project has been a key part of ECR’s strategic planning over the past year. The overall results package is extremely encouraging, and our thanks go to Adam Jones and the field team for an exceptionally comprehensive piece of field work,” said ECR Managing Director Nick Tulloch.

“It is clear that some of the grades and ‘drill ready’ zones indicate that ECR now has a potentially commercial proposition at Hurricane, but these conclusions have to be balanced against any cost of any option purchase agreed at the end of the extended time period, coupled with the capex required to progress the project to the next level. Along with Mike Whitlow, Adam Jones and the field team, we will now spend time assessing these results and how we can maximise the regional potential taking the wider Hodgkinson Province and our potential new Kondaparinga exploration license into account. I look forward to reporting back to you with our proposed course of action.”

Metro Bank shares sink on reports of £600m capital raise

UK Investor Magazine
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Metro Bank shares sink on reports of £600m capital raise

Metro Bank shares sank on Thursday after the Financial Times reported the challenger bank was in talks to raise £600m to bolster finances.

The Financial Times reported people with knowledge of the matter said Metro Bank were exploring a £250m equity raise and £350m in debt financing.

Metro Bank shares were down 18% at the time of writing on Thursday and have cratered around 60% over the past month.

The company announced in September they had been in discussions with the PRA about capital planning for their residential mortgage business but the regulator declined Metro Bank’s effort to lower their capital requirements.

Metro Bank has previously been fined for misleading investors about the risk of their mortgage business.

Tekcapital salutes ‘transformative’ progress at portfolio company Belluscura

UK Investor Magazine
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Tekcapital salutes ‘transformative’ progress at portfolio company Belluscura

Tekcapital issued an update on portfolio company Belluscura on Thursday and hailed ‘transformative’ developments at the portable oxygen concentrator unit manufacturer.

Belluscura has achieved a step change in orders with a potential $30m demand for DISCOV-R units. An additional licensing agreement with their Chinese partner could be worth $55m over ten years.

Dr Clifford Gross, CEO of Tekcapital, commented on Belluscura’s recent progress:

“We are very pleased to see the significant progress of Belluscura with enhancements to their balance sheet, regulatory approvals, personnel, and sales pipeline. Together we view these recent developments as transformative for Belluscura.”

To facilitate the manufacturing and distribution operations required by the burgeoning demand for their products, Belluscura has undertaken a fund programme which potentially totals in the region of £8m.

The fund packing comprises a conditional equity and convertible loan note issue, and a share-for-share takeover of TMT Acquisition. TMT Acquisition has £4.7m cash on the balance sheet, and the 10% convertible loan note issue will attract around £2.7m. The equity placing was just £600,000.

Belluscura shares are up around 30% since before the funding plans were announced earlier this week. Tekcapital has a circa 11% stake in Belluscura.

Further upside for Vertu Motors

Andrew Hore
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Further upside for Vertu Motors

Vertu Motors (LON: VTU) is the only major quoted motor dealer that is not the subject of a bid. The share price has risen by more than 31% this year, yet the valuation is still lower than for the rivals that are the subject of bids.

Supply of new cars improved, and the money made on each used car increased. Retail market share has risen to 4.6%.

In the six months to August 2023, revenues were 21% ahead at £2.42bn. There was a small dip in gross margin to 11%, but operating profit was one-third higher at £41.4m.

The Helston acquisition pushed Vertu Motors net debt to £90.7m, and that meant that the interest charge was higher, so pre-tax profit grew 12% to £31.5m. The interim dividend is 21% higher at 0.85p/share.

The share price rose 0.9p to 71p. That is similar to the net tangible assets of 70.9p/share. Trading was strong in September and the full year pre-tax profit is forecast to improve from £39.3m to £48m. Some capital investment is being delayed and net debt should start falling as the extra inventory unwinds.

The shares are trading on seven times prospective earnings. Lookers (LON: LOOK) is being acquired for nine times earnings, while the multiple for Pendragon (LON: PDG) is even higher – around elven to twelve times – although it includes the Pinewood software business.

Zeus estimates a value of 108p/share for Vertu Motors. That is equivalent to eleven times prospective earnings.

FTSE 100 flat as investors weigh US bond yields, Tesco jumps

UK Investor Magazine
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FTSE 100 flat as investors weigh US bond yields, Tesco jumps

The FTSE 100 was treading water on Wednesday as investors weighed economic data and political developments in the United States.

Expectations of higher interest rates for a prolonged period have sent US treasury yields higher, and the sell-off in US bonds is starting to show signs of rippling across financial markets.

At the same time, the removal of Kevin McCarthy as Speaker of the House of Representatives provided suggestions of disruption in Washington making US debt less attractive.

The FTSE 100 was up 1 point to 7,470 shortly after 1pm in London, while US futures looked set for a mildly higher open.

“It feels gloomy right now with a ‘higher rates for longer’ assumption helping to sour sentiment,” said AJ Bell investment director Russ Mould.

“This is reflected in the sell-off in bonds – with US government bond yields hitting levels last seen in 2007, not a year with particularly happy memories for investors.

“The most recent catalysts include the JOLTS job openings survey, which showed a surprisingly buoyant US labour market, and the uncertainty across the Atlantic created by a closely averted government shutdown and the shock ousting of Republican speaker of the House of Representatives Kevin McCarthy.”

There was a slight tick-up in US futures after US ADP jobs data came in worse than expected.

FTSE 100 movers

FTSE 100 constituents were pretty evenly split between gainers and losers on Wednesday, with a noticeable bid in more defensive shares while cyclical shares slipped.

Miners, oil majors, retailers and housebuilders were weaker as investors bought into consumer staples and utility companies.

Tesco was the top riser after first-half sales rose 8.4% to £30.8bn, and underlying operating profit jumped 13.9% to £1.5bn.

“It seems Tesco’s performing its own supermarket sweep, knocking competition out the way in the process and loading up on market share,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.

“As a full-line retailer it maintains an edge over the likes of Lidl and Aldi where you can’t quite find some more obscure ingredients. The enormous investment Tesco’s put in to being more affordable has also helped retain and attract customers while inflation’s been running so hot.”

Tesco shares were 3.9% higher at the time of writing.

Birkenstock pursuing $9 billion valuation in upcoming IPO

Eve Katz
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Birkenstock pursuing $9 billion valuation in upcoming IPO

After enjoying booming demand for its iconic sandals and broad range of footwear, the German company has filed to list on US markets and is said to seek a $9.2 billion valuation on its initial public offering (IPO) on the New York Stock Exchange.

Birkenstocks announced their plans to list shares in New York in the region of $44–$49 per share, which is expected to raise around $1.6 billion for Birkenstock and their private equity owner, U.S.-based company L Catterton.

L Catterton will have around a 83% stake in the company after the IPO.

Birkenstocks said most of the proceeds will go to repaying its current debt and has no plans to pay a dividend in the near term.

Birkenstock generated €1,242.8 million in revenue in fiscal 2022, up from €727.9 million in 2020.

Birkenstock’s IPO will follow major IPOs by ARM Holdings and Instacart in recent weeks as capital markets fire up after months of next to no activity.

Joint book runners for the IPO include Goldman Sachs, JP Morgan and Morgan Stanley.

AIM movers: Neometals impressive lithium recovery rates and Oracle Power raising funds for green hydrogen

Andrew Hore
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0
AIM movers: Neometals impressive lithium recovery rates and Oracle Power raising funds for green hydrogen

Neometals (LON: NMT) says that the new lithium recovery process has led to more than 93% lithium recovery from batteries in the form of lithium fluoride. This should reduce operating costs and capital investment. The proposed offtake agreement with Jiuxing Titanium Minerals for the Barrambie titanium project in Australia was not agreed and other partners are being considered. Cavendish values Neometals at 140p/share.  The share price rose 8.57% to 19p.

Shares in Safestyle (LON: SFE) recovered 9.65% to 2.84p, although there is no news concerning the talks with interested parties about a fundraising to provide working capital. It is a tough market for the windows manufacturer, but the directors believe that they will be able to obtain the finance required.

Brandshield Systems (LON: BRSD) shares edged up by 7.95% to 2.85p as director William Currie is buying shares ahead of the proposed cancellation of the AIM quotation. He has taken his stake to 13.3%. Finance director Ravit Freedman is leaving.

Sabien Technology (LON: SNT) is rolling out its M2G cloud-enabled gas boiler energy saving technology in the US. Greffen Systems in Texas will be the first installation partner in the US. There could be additional revenues of £100,000 this year. The share price improved 6.06% to 8.75p.

Bens Creek (LON: BEN) increased coal production to 50,100 tonnes in September, up from 42,691 tonnes the previous month, and it is expected to continue to increase. The first half production more than doubled to 204,998 tonnes. The coal price has recovered, so Bens Creek will be reducing its loss. The share price is 5.45% higher at 14.5p.

FALLERS

Resources projects developer Oracle Power (LON: ORCP) is raising £350,000 at 0.035p/share with one warrant exercisable at 0.07p attached to every two shares. In order to do this, there has to be a capital reorganisation in order to reduce the nominal value of the shares to 0.001p. The cash will be spent on the company’s green hydrogen project, which will have a 400MW capacity. The share price slumped 60.5% to 0.03p.

i(X) Net Zero (LON: IX.) investee company Sustainable Living Innovations Inc, where it holds an investment valued at $770,000, will not reverse into Churchill Capital Corp V. The share price of the sustainable investment company fell 9.3% to 19.5p.

Europa Oil & Gas (LON: EOG) says that the availability of the licence of the Tain discovery in the North Sea could benefit the Serenity oil discovery, where the company holds 25%. The Europa Oil & Gas share price has dipped 7.41% to 1.25p. The operator of Serenity is i3 Energy (LON: I3E) has commenced discussions about the licence and the share price slipped 1.76% to 13.4p.  

The latest budget from the Trinidad and Tobago government should ensure than Trinity Exploration and Production (LON: TRIN) will not pay any supplemental petroleum tax in 2024. The threshold price for offshore assets has been raised by 50% to $75/barrel, while the sustainability incentive has been raised from 20% to 25% to encourage investment. There will be a review of the capital expenditure write-off regime. The share price declined 6.47% to 79.5p.

How rising US government bond yields are impacting UK assets

Eve Katz
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0
How rising US government bond yields are impacting UK assets

A sell-off in US government bonds is underway as markets position for US interest rates to stay higher for longer amid positive US economic data.

A raft of upbeat US economic data has poured cold water on hopes of a rate cut early next year and many now see interest rates remaining higher for a prolonged period.

US 10-year bond yields were 4.80% on Wednesday morning – the highest level since 2007.

As bond prices fall and yield rise, the impact on borrowing costs is hitting interest-sensitive assets, such as equities, corporate bonds and the government bonds themselves. 

For people within the UK, a potential side effect of the US government bond rout is higher yields in UK bonds and higher borrowing costs which could have wide-reaching implications including lower corporate profits, reduced investment and they could even affect housing prices.

Steadily increasing US bond yields have helped support the dollar and send GBP/USD down to 1.2124. GBP/USD had been as high as 1.319 in July.

A weaker pound can be supportive of the FTSE 100’s overseas earners but if global debt yields increase in line with US treasuries, it will increase funding costs for major corporations.

There will also be concerns around the UK housing market, although we are yet to see any major disruption. Should yields continue to rise it could impact mortgage rates and further curtail activity in UK property.

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