Stock Indices

How to Trade the Intangible – a Mathematical Conundrum…

Just as the Romans predated the Brits with shares (the probable reason why the word indices still exists), the English coffeehouse brokers of the 17th century preceded Standards and Poor’s by about 200 years – John Castaing publishing his first listing of stock and commodity prices in Jonathan’s Coffee House in 1698 – the year stock brokers were banished from the Royal Exchange for their rowdy behaviour.

Trade the Economy, not the Company

Whether it’s the stock indices that measures the performance of the corporate environment, or the Purchasing Manager’s Index, which measures the performance of the nation’s economy, indexes are fascinating because they’re not instruments you can directly invest in. They provide a measure of activity; they’re a mathematical construct – a product manufactured by polling companies, credit ratings agencies and other advisory entities.

And yet, we trade on them every day: We buy Euros if Europe’s Consumer Price Index goes up and sell them if ZEW’s Manufacturers’ Sentiment Index goes down. We buy NASDAQ futures when the economy is booming and dollars are cheap, sell them when Apple threatens to embark abroad.

So, what are indices and how can we trade them?