Did you know that equity markets can also be used to help gauge currency movement?
In a way, you can use the equity indices as some kind of a forex crystal ball.
Based on what you see on the television, what you hear on the radio, and what you read in the newspaper, it seems that the stock (equity) market is the most closely covered financial market.
One thing to remember is that in order to purchase stocks from a particular country, you must first have the local currency.
To invest in stocks in Japan, a European investor must first exchange his euros (EUR) into Japanese yen (JPY).
This increased demand for JPY causes the value of the JPY to appreciate. On the other hand, selling euros increases its supply, which drives the euro’s value lower.
When the outlook for a certain stock market is looking good, international money flows in.
On the other hand, when the stock market is struggling, international investors take their money out and look for a better place to park their funds.
Even though you may not trade stocks, as a forex trader, you should still pay attention to the stock markets in major countries.
If the stock market in one country starts performing better than the stock market in another country, you should be aware that money will probably be moving from the country with the weaker stock market to the country with the stronger stock market.
This could lead to a rise in the value of the currency for the country with the stronger stock market, while the value of the currency could depreciate for the country with the weaker stock market.
Here’s the general idea:
Strong stock market = strong currency.
Weak stock market = weak currency.
If you bought the currency from the country with the stronger stock market and sold the currency from the country with the weaker stock market, you can potentially make some nice dough.
Not too familiar with the major global equity indices? It’s your lucky day! Here they are!
| Equity Index | Description |
| Dow | The Dow Jones Industrial Average (or Dow for short), is considered to be one of the premier stock indexes in the U.S. It measures how well the top 30 publicly owned companies are trading. Despite the name, barely any of the companies have anything to do with industrial production and are instead representative of some of the biggest companies in America. It is closely watched by investors around the world and is highly indicative of market sentiment, thus making it sensitive to both local and foreign economic and political events. The companies that are part of the Dow are so large that you probably deal with at least one of them every day. Imagine life without Apple, McDonald’s, Disney, or Nike? Yes – these companies are all listed in the Dow! |
| S&P 500 | The Standard & Poor 500, more commonly known as the S&P 500, is a weighted index of the stock prices of the 500 largest American companies. It is considered a bellwether for the American economy and is used to predict its direction. After the Dow Jones Industrial Average, it is the most traded index in the U.S.Some mutual funds, exchange-traded funds, and other funds such as pension funds, are designed to track the performance of the S&P 500 index. Hundreds of billions of U.S. dollars have been invested in this fashion. |
| NASDAQ | NASDAQ stands for the National Association of Securities Dealers Automated Quotations. It refers to the largest electronic screen-based equity securities trading market in the U.S., comprising of approximately 3,700 companies and corporations. It also boasts of having the largest trading volume among the world’s stock markets. |
| Nikkei | The Nikkei, similar to the Dow Jones Industrial Average, is the most widely quoted average of the Japanese stock market. It is a price-weighted average of the top 225 companies and is supposed to be reflective of the overall market. The Nikkei includes companies like Toyota, Japan Airlines, and Fuji film. |
| Dax | The DAX is short for the Deutscher Aktien Index (you’re probably better off remembering just DAX). It is the stock market index in Germany that consists of the top 30 blue-chip companies that are traded on the Frankfurt Stock Exchange. With Germany being the largest economy in the eurozone, the DAX is normally the most closely watched index within the whole eurozone. Some companies that are part of the DAX are Adidas, BMW, and Deutsche Bank. |
| DJ EURO STOXX 50 | The Dow Jones Euro Stoxx 50 index is the euro zone’s leading blue-chip index. It comprises over 50 top-sector stocks from 12 eurozone countries. It was created by Stoxx Ltd., which is a joint venture of Deutsche Boerse AG, Dow Jones & Company, and SIX Swiss Exchange. |
| FTSE | The FTSE (pronounced “footsie”) index tracks the performance of the most highly capitalized UK companies listed on the London Stock Exchange. There are several versions of this index, such as the FTSE 100 or FTSE 250, depending on the number of companies included in the index. |
| Hang Seng | The Hang Seng index is a stock market index in Hong Kong. By recording and monitoring the daily price changes of the stocks included in the index, it tracks the overall performance of the Hong Kong stock market. This index is currently compiled by the HSI Services Limited, which is a subsidiary of Hang Seng Bank. |
