How to Trade the Major Indexes
- Trading the S&P 500, Nasdaq, Dow, and Russell 2000 can be done in several ways, depending on your risk tolerance, investment horizon, and strategy.
- ETFs are one of the easiest ways to gain exposure to these indices without trading individual stocks.
- Futures allow for overnight trading, higher leverage, and precise risk management through margin accounts. For more active traders, futures provide leveraged exposure to these four major indexes.
When it comes to investing or trading the stock market, you can choose to invest in individual companies, a sector, or even an index. The easiest way to track how the overall market is performing is by following the S&P 500, Nasdaq, Dow, and Russell 2000.
These indexes represent the best companies in the world that include the broader market, Tech, blue-chip and the small-caps. Trading the S&P 500, Nasdaq, Dow, and Russell 2000 can be done in several ways, depending on your risk tolerance, investment horizon, and strategy.
Some of the best methods include ETFs (exchange traded funds), options and futures trading. To start, ETFs are one of the easiest ways to gain exposure to these indices without trading individual stocks.
If you want to track the Nasdaq, start your Watch List by add the Nasdaq-100 (NDX) and Invesco QQQ (QQQ). You can also add Invesco NASDAQ 100 ETF (QQQM) which is a cheaper alternative to QQQ with similar exposure. ProShares Ultra QQQ (TQQQ) is a 3x leveraged version of the QQQ’s for aggressive traders.
For the S&P 500 (SPX), you can also add the SPDR S&P 500 ETF (SPY) which is one of the most popular ETFs for S&P 500 exposure. The Vanguard S&P 500 ETF (VOO) is similar to SPY but with lower expense ratios. Another cost-effective alternative is the iShares Core S&P 500 ETF (IVV).
Trading small-cap stocks can be accomplished by following the Russell 2000 (RUT) and the iShares Russell 2000 ETF (IWM). The ProShares Ultra Russell 2000 (UWM) is a 2x leveraged version of the index and the ProShares UltraShort Russell 2000 (TWM) is a 2x inverse version (for shorting).
The Dow Jones is comprised of just 30 stocks and is a price weighted index. The Dow Jones Industrial Average (DJIA) and the SPDR Dow Jones Industrial Average ETF (DIA) are the best ways to follow the index. The 1/100 Dow Jones Industrial Average Index (DJX) is a cheaper alternative to gain exposure to the index.
Futures allow for overnight trading, higher leverage, and precise risk management through margin accounts. For more active traders, futures provide leveraged exposure to these four major indexes.
The Nasdaq-100 is represented by the E-mini Nasdaq-100 Futures (NQ) and the Dow Jones E-mini Dow Futures (YM) track the blue-chips. The S&P 500 E-mini S&P 500 Futures (ES) can be used to track the S&P and the broader market. The Russell 2000 E-mini Russell 2000 Futures (RTY) give you exposure to the small-caps.
As far as trading options on the major indexes, savvy investors use calls and puts. If they expect an index to go up, they buy call options on ETFs like QQQ, SPY, DIA, or IWM. If they expect a pullback, they buy put options.
There are also other ways to use options and they include covered calls. This is where you would sell call options against a stock or ETF to generate income. Options also provide leveraged exposure with defined risk.
Credit Spreads (Bull Call / Bear Put Spreads) can reduce risk by simultaneously buying and selling options. Using Iron Condors is considered a neutral strategy that profits from low volatility.
Most long-term investors use ETFs like QQQ, SPY, DIA, and IWM. Short-term traders tend to use options, leveraged ETFs, or futures. For hedging and volatility trading, traders tend to use index options or inverse ETFs. Incorporating these strategies into you arsenal can be beneficial if you just want to track the overall market.
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