Written by: Sophie May
An index is a statistical measure of the overall changes in a group of stocks. Indices were first applied to stocks in the late 1800s to give investors an overall feel of general market performance. Today they are a crucial indicator of economic health. In the US for example, the Nasdaq, S&P 500 and the Dow Jones Industrial Average are used as benchmarks for the country’s overall economy.
The underlying asset of each of these various indices is essentially a group of different assets. Index option trading therefore provides greater diversification and stability. From the investor’s viewpoint, indices are also often easier to follow and understand than more volatile underlying assets. The effects of unexpected news and global events on indices are limited in comparison with their effects on individual stocks.
Regular vanilla options markets also offer future contracts on indices like the S&P 500 and the Nasdaq. However smaller investors can often be priced out of this market, since an individual index futures contract can cost several thousand dollars. Binary options traders avoid this, and can decide how much capital to invest in any trade. All good binary options brokers offer a range of indices, accounting for the main global economies. Index traders on these binary platforms simply have to predict the overall direction of the market in a set time frame.