Nowadays it's becoming more and more popular to trade financial instruments, which are related to Stock Indices.
Index investment means that you closely track the price and yield performance of any index. In order to do it you build your investing portfolio using instruments which track the index. These tools can help investor to build a diversified portfolio.
But for small investors and traders it's hard to invest in NASDAQ 100 or S&P 500, because it's required to have more than one share of any company listed in these indexes. Recently only professional investors with million dollars portfolios could invest in indexes.
The first step in developing of this type of investment for small traders was made in 1993 when S&P unit investment trust was introduced. Known as "Spiders," a SPDR is a unit investment trust that holds shares of all the companies in the Standard & Poor's 500 Composite Stock Price Index (S&P 500). The price of a unit in the trust is always the current value of the S&P 500 Index divided by 10.
Next step was made in 1997 when DIAMONDS, an index product based on the Dow Jones Industrial Average, appeared (DIA, trade around 1/100th of the value of the Dow). And then, in 1999 the Nasdaq-100 Trust was introduced (QQQ (Cubes), trade around 140 of the value of the Nasdaq 100).
- After that many investors got the opportunity to invest in indexes because they traded on stocks and as of 05142003 the prices were:
- SPY - $94.71,
- DIA - $87.04,
- QQQ - $28.66.
Generally, investors like trading Cubes, Diamonds and Spiders (catchy names from traders' jargon), as you don't have to be a market pro to understand and trade them. In fact their volumes are much higher than trading other stocks.
The main points you need to pay attention at:
- The value of the share to the index is not fixed, as you need to use calculations, moreover it depends on the demand and supply.
- SPY - 1/10 of the value S&P 500;
- DIA - 1/100 of the value DJIA 30;
- QQQ - 1/40 of the value NASDAQ 100.
- Value differentials of the shares and underlying indexes give a great opportunity for arbitrage. It is called "Program trading" because it's so widespread and computerized. Security and Exchange commission of US government controls American Stock Exchange and release the information of Program Trading value daily, usually it's not less than 30% of total value on the exchange.
- Index trust shares are highly liquid. Day volume can be more than 100 mln shares.
- At the beginning of 2002 the assets of stock exchange funds were more than $82 bln.
- Dividends on SPY and QQQ shares are paid once a quarter and because of the listed companies the size is rather small. Dividends on DIA shares are paid on monthly basis.
All that makes it possible for the small investor who is not so sophisticated in fundamentals of each company to use these excellent tools for investing.
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