While equity traders tend to focus on specific companies and hold their stocks over long period of times, more and more binary option traders chose indices as their underlying assets. This is because indices are less volatile and less sensitive to external shocks than individual equities. Investors are thus able to benefit from the direction of indices via the leverage of binary options without suffering the specific risk of a single company.
In the financial theory, analysts distinguish the market risk and the asset risk. The market risk represents the global risk of the market. When the US GDP growth is disappointing, the market is likely to trade lower and it can be associated to the global market risk. An asset risk is the risk that is strictly specific to the mentioned asset. For a specific equity stock, the incoming earning release represents an asset risk as the outcome of the result will almost only impact the price of this specific company shares.
What are equity indices and how to trade them?
As you may know, an equity index is a portfolio of several companies that is used as a benchmark for the financial health of geographical area, a particular market or a portion of it. For instance, the FTSE100 is an average of the share prices of the 100 largest and most actively traded companies on the London Stock Exchange. This index is thus used as a benchmark for the financial health of the United Kingdom stock market. If you read on the press that the FTSE 100 is up, it means there are more people buying than selling shares in the London Stock Exchange. It also means the majority of UK equity stock prices are up. Conversely, if more people are dumping shares the index goes down.
Being an arithmetic average of multiple share prices, indices were not tradable for years and were just used to have a quick overview of the market performance. Investors can now trade indices via ETFs, CFDs and binary options and they have become extremely popular. They are specifically popular among retail traders that want to have a general exposure to the equity market without having to know the specificities of any company.
Advantage of indices for binary option traders
Why are equity indices so popular among retail investors? An index enables trader to diversify their exposure. An index tracks the general performance of the chosen market and each company related news is compensated by the performance of other companies included in the index. Spreading the risk of trading on an entire market can be beneficial as the largest stock markets often have a general trend which can be traded, as a reflection of the overall market sentiment. Indices are also extremely sensitive to technical analysis patterns. Since every trader on the street is looking at them, indices tend to be ideal candidate for the construction of trading strategies based on technical analysis patterns.
Top 5 indices for binary options trading
While there are multiple indices to choose from, there are some that tend to be more important than others when using binary options. You specifically want to trade the most popular ones to benefit from the liquidity and volatility of the market. According to official data from multiple brokers as well as our own experience in financial markets, we believe the below indices are the top 5 candidates for binary option traders:
- Dow Jones Industrial Average (DJIA) – The DJIA is an index that tracks the performance of the US industrial market. While it has long been the most popular equity index on Wall Street, the S&P500 is slowly replacing it as the most followed index.
- S&P 500 – The S&P 500 is a US stock market index that contains the equity stocks of the 500 largest companies that are located in the United States. The Index takes into account the sector of the company in order to represent every section of the US economy.
- NASDAQ 100 – An index that includes 100 of the largest domestic and international non-financial securities listed on the Nasdaq Stock Market. It used as a proxy for the performance of the US technological sector.
- DAX – The DAX is a stock market index that includes 30 of the largest and most liquid German companies that are traded on the Frankfurt Exchange.
- FTSE 100 – The FTSE 100 is a stock market index that includes 100 of the largest British companies that are traded on the London Stock Exchange.
Almost all our recommended brokers propose the best binary options on the mentioned indices with a set of different option types and maturities. Don’t hesitate to have a look at our detailed review of 24option, Interactive Option, Anyoption and TopOption for more information about these brokers. Good Luck!