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When trading indices (like s&p 500, nasdaq 100...etc), Are we buying share/fraction of shares of every stock in it (like ETFs)? or we are just betting that the number(value) of this index (for example s&p 500: 4190.33 as its today) wil go up or down ?

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  • Are you talking about trading something like shares in an index fund tracking the S&P or the NASDAQ?
    – Upper_Case
    May 25, 2021 at 18:24
  • In some trading platforms, I only see futures/options are available for indices trading, in others I see buy/sell available which I didn't understand.. the index fund tracking the s&p, nasdaq.. was my first impression of the meaning of indices trading, and this is what I thought it should be. (I'm beginner)
    – huab
    May 25, 2021 at 18:37

1 Answer 1

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Indices aren't physical instruments that you can trade, no. The most common way to "trade" an index is to buy shares of a mutual fund that tracks the index. Some mutual funds can fully replicate an index, making the tracking very close. Others will track an index by sampling the index (buying parts of the index that make up a large portion of the returns) that may have some tracking error. This is more common on very large indices like the Russell 5000 that cannot be replicated practically.

There are also over-the-counter instruments like derivatives (futures/options) and swaps that have payouts based on the value of that index (e.g. if the S&P goes up 5% then you make a 5% return on your investment), but those are typically only available to large institutional investors. For retail investors, funds and ETFs, which are just mutual funds that can be traded during the day, are the primary ways to follow an index.

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  • @D Stanley In which category indices futures contracts are ?(Is it a futures contracts on these mutual funds?)
    – huab
    May 26, 2021 at 15:04
  • @huab They would be categorized as "derivatives" in the second paragraph. The payout of the futures contract is the difference between the index at the time you entered and the value at the end of the settlement date (times some multiplier)
    – D Stanley
    May 26, 2021 at 15:18

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