The simplest way to answer Why Trade Indexes is to understand what trading an index really is. An index is a group of stocks put together to make up one item such as the ASX 200, which is a group of 200 stocks listed on the Australian Stock Exchange. Other indexes you may have heard of are the Dow Jones, which is a US index with 30 stocks or another US Index called the S&P 500, which is obviously 500 stocks. In the UK they have an Index called the FTSE 100.
One of the challenges investors face when buying a portfolio of stocks is which stock to buy. Then of course there is the decision of when to sell them. Having to make multiple decisions often leads to confusion and this can often lead to making poor investment decisions. Give someone a ball and ask them to toss it in the air and they’ll catch it 95% of the time. Give them 2 or more balls and they’ll likely drop both.
But imagine instead of having to make the decision of what stocks to buy or sell you only had to make one decision. Is the overall direction of the stock market going up or down? You only need to pick the direction correctly and you can even make money with indexes when the stock market goes down. For example, if you think the index is going up today then you buy a position at the opening of the market and you can sell it at any time in the future, today, tomorrow, next week or next month.
The world’s greatest investor Warren Buffet was asked what his top recommendation was for a new investors. His reply. “Over time you’ll do much better buying the Index rather than trying to trade the stocks within it.”