What is an Index?
It is an indicator used to determine the status of a specific financial market, i.e. reflect the entry or exit of money at the financial market and its corresponding effect on prices.  In summary, an index measures the health of a financial market using a compensation of the prices of various shares of certain companies of the market.
 

 

But how do you determine the value of an index?
Through an average of the values that compose it.  This average can be calculated having in mind the market capitalization of each value or regardless of the capitalization.  The rates are used to "summarize" the behavior of the different values listed in a single market data.  Let's create an index composed of only 3 values (they are imaginary, just as an example):
 

• Microsoft: Quotes at $ 20 dollars and its social capital consists of 100 shares.
• Yahoo:  Quotes at $ 40 dollars and its social capital consists of 30 shares.
• Terra: Quotes at $ 10 dollars and its social capital consists of 15 shares.
 

The initial calculation of the index would be as follows:

1.  Having in mind the market capitalization of each value: These are called weighted indexes.
 

First, it would be calculated the market capitalization of each value:
 

o  Microsoft = $ 2.000 dollars (20 x 100)
o  Yahoo = $ 1.200 dollars (40 x 30)
o  Terra = $ 150 dollars (10 x 15)
 

The sum of the capitalization of the three companies would be $ 3.350 dollars (2,000 + 1,200 + 150).  This value of $ 3.350 dollars could be left as an initial value of the index and go from there calculating their daily differences.  The problem is that it would be hard to follow because in this example I have used very low numbers, but in reality this number would be several hundred billion dollars (the sum of the market capitalization of all companies in the DJIA, for example ) and would be very difficult to follow its evolution in an agile way.  That´s why the most usual (by tradition, clarity, etc.) is to establish a value of 100 (or any other round number like 1,000 or 10,000) as the value of the index on the first day it is published.  This is done through so-called "divisor" of the index.  It is this number that gives a value of 100 by dividing the sum of the capitalization of the index between the divisor.  In our case, the divisor would be 33.5 (3,350 / 33.5 = 100).
 

So the index in the example would appear in the media the first day with a value of 100, thanks to the divisor of the index (33.5 in this case).
 

Suppose that the next day Microsoft closed at $ 21 dollars (it increase $ 1 dollar), Yahoo at 37 (decrease $ 3 dollars) and Terra closes at 11 euros (up $ 1 dollar).  The calculation of the index would be the second day the same way; sum of the market capitalization of all companies that compose the index / index divisor.  The divisor does not change (33.5) and the new sum of all the caps would be: 21 x 100 + 37 + 11 x 30 x 15 = 3.375.  Thus the index value on the second day would be 100.75 (3.375 / 33.5), thus the index would have risen 0.75% since there would be increased from 100 to 100.75. In the same way it would still be calculating the value of this index on successive days and years to establish its evolution from the previous day.
 

2.-Regardless of the market capitalization of each value: These rates are called unweighted.  The procedure is very similar, the only difference is that the calculations do not use the market capitalization of each value.  First we would add the value of the three shares, which in this case would be 70 (Microsoft 20 + Yahoo 40 + Terra 10).  Then, the divisor would be found for the first day in order that it had a value of 100, in this case the divisor would be 0.70 (70 / 0.70 = 100).  With the same variations of measures during the second day the new index value would be 98.57, (21 + 37 + 11) / 0.70 = 98.57.  In this case the index would have fallen by 1.43%, from 100 to 98.57.
 

We see that the form used to calculate the index is very important since with the same data in the first case, the "Stock" increases by 0.75% and in the second case, the "Stock" goes down by 1.43%.  The first method, which takes into account the capitalization, is the most used.  The NASDAQ 100 and the Eurostoxx 50, for example, are calculated the same way.  The second method is used in the famous Dow Jones U.S. stock market.  Indeed, his full name is Dow Jones Industrials Average (DJIA).  There are many indexes that are in his name the words "Dow Jones", but always referred to the index "Dow Jones" without specifying anything else, it is meant to be the DJIA.  For example, the Eurostoxx 50 is actually called "Dow Jones Eurostoxx 50."  Dow Jones is the company that calculates and publishes all these rates.
 

Each method has its advantages and disadvantages. In the first case, taking into account the capitalization, companies with more capital are the ones that can push the entire index in one direction, that is if these companies increase the index value, goes up easily without realize the majority that have less capital are falling quickly.  But in the second case, regardless of capitalization, if the majority of small businesses increase much in value, the index shows upward without realizing that most of the capital is actually going out of the market.
 

Therefore it is very important that when creating an index, to select the shares that constitute it, considering besides the importance that capitalization has in the market, meaning that the company is very popular among investors.  And so it is, the Dow Jones, contains huge enterprises, but also includes smaller companies but very popular.
 

What is a futures contract?
In the futures market it is quoted most of the world commodities such as corn, wheat, gold, copper, oil, etc.  The purchase of these commodities is carried through contracts so you do not have to receive and hold the commodity, so the futures contract is the financial form where you can buy these materials.
 

What is Forex?
Forex is the currency market where the euro, British pound, Japanese yen, and even the Mexican peso are quoted.  It is an exchange market where you can take advantage of the variation of one currency against another to make a profit in its favor.
 

What is a Market Maker?
The Market Maker are a few companies that have direct access to financial markets, directly to auction floors, but these companies operate as wholesalers, they do not receive investments under $ 4 million dollars.  But there are companies that bring close the market to us opening an account with the market maker and giving us access to smaller accounts.
 

What is a Discount broker?
It's like a retail store, it opens an account of four million dollars or more with the market maker and gives us access to the market with a smaller investment.  And it distributes this access into the market to all its customers to do trades.
 

But here's something better, not just the Discount broker opens an account with a market maker of the stock, but also opens another account with a market maker for commodities and with other market maker in Forex or currencies and even with a market maker of the German stock market
That way you can have access to stocks, Forex and commodities from a single trading platform and with an investment from a thousand-dollar
 

What is the Spread?
The spread is the difference between buying and selling financial instruments, whether a financial instrument listed on the 8495, you can buy but at a slightly higher price, 8499, this is the profit of discount broker.  That is, the difference between buy price and the sell price from the broker to the customer.
 

What is a financial trader?
A financial trader is the person that through an analysis is responsible for buying and selling financial instruments with the objective is to earn money for their clients, there are two types of financial traders, the trader who only executes the orders of his client's requested by them, and the trader who manages on a discretionary way the client's account using a strategy that he has already used.
 

How do you define an trade?
A trade is an entry and exit from the market, when buying an instrument it is said you have entered the market but the trade is not complete, the transaction is complete when the instrument is sold. In the markets there are three kinds of state, it can be long, it can be short or it may be out of the market.  In summary, a trade is complete when you get out of the market.
 

What is long?
Long is a common position where we buy a financial instrument, hoping that the price rises, if it goes up we win but if the price goes down we lose, i.e. we buy hoping to sell at a higher price and until we sell it is said that our position is long.  (Not referring to time, it refers to the type of trade, also it can take an hour and be a long position)
 

What is short?
Short is an opposite position to the long one, where we sell now with the hope that the price falls, i.e. we sell now to buy later at a lower price, if the price goes down we win but if it goes up we lose.
 

This type of operation is very old in the financial markets of developed countries and technically it works like that.  The broker lends a share or any instrument for you to sell on the market at current price and the money is added to your account (but you cannot withdraw this money because it has the financial instrument).  Note, you owe the broker a financial instrument, you DO NOT owe money.  If the price drops, you buy it and keep the difference.
 

For example, Yahoo shares now are worth $ 45 dollars, the short one is made by selling the share and you are paid $ 45 dollars to your account, then yahoo drops to $ 35 dollars, then take 35 from the 45, you buy the share and return it to the broker.  And then you earn $ 10 dollars per share.
 

What is the risk?
Risk is defined as the level of the possible loss that can lead to a position in the market.  For example, we can buy now at $ 10 dollars an instrument with the hope that prices increases to $ 20 dollars, but we do not know the future and then we determine that if it falls to 7 we will close the transaction with the loss of $ 3, to this possible loss it is called risk.