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Dax 40 is the new reference to the German stock index. The Stock index which consisted of 30 companies has an additional 10 bluechip companies. With the additional companies, it will now be referred to as Dax-40. This is expected to happen in September 2021.
As a stock index for blue-chip companies in the German exchange, there are new rules. For a company to get included in this stock index, it has to meet specific levels of profitability. This is not only significant to the country but also to traders all over the world.
How is this significant to traders?
Table of Contents
Greater Diversification
With more companies now classified as blue-chip in the German exchange, traders have a variety of stocks to trade.
With more stocks available, traders have more opportunities to profit in the German stock exchange.
With greater diversification, traders can hold a diverse portfolio of stocks based on the Dax 40 companies. With a diverse portfolio, losses from some stocks can be offset by profits from the stocks that make profits.
Reflect The State Of The Economy
The stronger the Dax40 the stronger the economy. The state of the index provides a guide on how the rest of the economy is faring. The stronger the performance of the index, the stronger the economy.
For traders, a strong index may indicate other stocks that are also attractive to trade. This means that a stock in the index can u used as a representative of other stocks in the same sector. If the stock in the index is rising, other stocks in the same sector may also be rising.
As a trader, you can compare the stock in the index and other stocks to check the stocks from which you may earn more profit depending on the direction they are moving.
Asses Investor Expectations
The direction of movement of stocks in an index also indicates how investors expect the stocks to move. When investors expect an increase in the price of a stock, they buy more of it. When they expect a decrease, they don’t buy as much and may even sell.
As a trader, the more the demand for stock rises, you are sure that the price will rise. You can also start buying as you wait for the price to rise. Once the price has risen, you can then sell your holdings and make your profits.
Also, you can wait for the price to get to its lowest price. You can then buy at this low price, hold the stock for a while until the price rises and then sell to make your profit.
Benefits Of Trading Indices To Traders
There’s No Risk Of Bankruptcy
As a trader, when you trade an index, you know your money is safe. When you trade an index, you are not trading an individual company. Rather, you are trading a combination of several companies.
In this case, your stock is not pegged to a company. Thus. you are unlikely to suffer the risk of company bankruptcy. Even if one of the companies in the index goes bankrupt, it will only slightly affect the index.
Price Stability
The price of an index is relatively stable. This is because an index is made up of several companies in the exchange. The price of a stock index moves in the same direction as the majority of the companies of which the index is composed.
When the price of most companies in the index rise, the price of the index will rise. And the same for when it lowers.
The price of an index is stable as it is hard to manipulate. The price of a single stock can change easily as a result of a certain announcement. If the stock is part of the index, the change in its price will hardly reflect the price of the index.
This makes it a good investment if you want to protect your money from losing value.
Spread Your Risk
Financial managers advise investors not to keep all their eggs in one basket. This is a call to investors to diversify their holdings. The more diversified an investor is, the less likely they are to incur losses on their holdings.
If a stock in the portfolio makes a loss, other stocks are making a profit. This is the essence of diversification.
Investing in a stock index is similar to investing in all the stocks in the index, thus, diversifying automatically. The nature of an index ensures that the investor limits their risk of loss automatically.
Conclusion
The expansion of the Dax 40 is a great advantage to traders. They now have more companies with which to gauge the strength of the exchange. This also leads to a more stable index that minimizes the risk of loss of investment.
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