Everything About Nikkei 225 – a Leading Japanese Stock Market Index

Everything About Nikkei 225 – a Leading Japanese Stock Market Index


03 Feb 2020

You may already know about the Dow Jones at the New York Stock Exchange or the FTSE at the London Stock Exchange. These indices are used to gauge the performance of a certain market sector and speculate on it rather than individual stocks. Similarly, the Nikkei 225 is an underlying index at the Tokyo Stock Exchange.

Nikkei Definition

Nikkei 225 is Japan’s most important index, which reflects business activity in the country. It contains 225 stocks from different companies traded on the Japanese Stock Exchange. The index itself displays the average arithmetic value of these stocks. It was introduced on September 7, 1950, meaning at that time, its value was published for the first time. It was named after a newspaper that calculated it.

There are different variations of the index: Nikkei 500, Nikkei Stock Index 300, and Nikkei All Stock Index. All of them display somewhat similar information, but the Nikkei 225 is still considered the leading, most widely used indicator.

The selection criteria are based on the price of the company’s stock rather than market capitalization, like in some other indices. Only the largest ones make it to the list of constituents. The higher-priced stocks have the largest influence on the index.

Understanding the Meaning of Nikkei

The Nikkei 225 consists of stocks selected from top-performing blue-chip companies based in Japan. The main criteria for being selected are the price of the stock, liquidity, and sector balance. Also, the stock must be listed on the Tokyo Stock Exchange First Section.

The composition of the Nikkei 225 is subject to an annual reexamination – a Periodic Review. This takes place in October, where every company is checked to determine whether it fits the criteria. And the process of changing the list of constituents is called an Extraordinary Replacement.

NameIndustryWeight (%)
Fast Retailing Co., Ltd.Retail10.45
Softbank Group Corp.Communications4.26
Tokyo Electron Ltd.Electric Machinery3.46
Fanuc Corp.Electric Machinery3.37
KDDI Corp.Communications2.80
Daikin Industries, Ltd.Machinery2.33
Terumo CorpPrecision Instruments2.24
Kyocera Corp.Electric Machinery2.22
Shin-Etsu Chemical Co., Ltd.Chemicals1.92
Familymart Co., Ltd.Retail1.71

It is calculated based on the value of the 225 most liquid stocks of the Tokyo Stock Exchange. The formula was developed by the American company Dow Jones & Co., which differs from their European counterparts.

Factors Influencing the Nikkei 225 Index Price

It is commonly known that Nikkei 225 is extremely sensitive to not only local news and events but also those events occurring around the world. Traders who work with the Nikkei index should closely monitor:

  • Japan’s macroeconomic indicators: inflation, deflation, unemployment rate, the number of new jobs, etc.
  • financial prosperity of individual companies included in the index
  • The overall situation in foreign stock markets, but especially movement in the US market. If the Dow Jones index rises, Nikkei will react in a similar way
  • World events, natural disasters, wars, political instability, and economic news The tight connection between the Japanese and American markets, particularly their main indexes, is attributed to Japan’s exports to the USA. Therefore, you should keep an eye on the dynamics of the S&P 500 and the Dollar Index as well as other US indicators.

Advantages and Disadvantages of Nikkei 225

The Nikkei 225 has specific differences that make it stand out from indices like FTSE or DAX. When contemplating whether you should invest in this instrument, keep in mind the following benefits:

  • The simplicity of being a price-weighted index
  • Ease of tracking the overall health of the economy
  • Fixed spread
  • Long trading hours
  • Less risk than capitalization-weighted indexes

There is no financial instrument that is flawless and carries zero risks. In this context, here are some considerations regarding the Nikkei index:

  • Significant effect of small firm stock changes
  • No attention to the size of the industry sector
  • Vulnerability to sudden drops in the bear market

What is Nikkei 225 CFD Trading

The Nikkei 225 remains the most widely quoted average in Japan because of good trading opportunities. However, the Nikkei index is not directly tradeable. Instead, there is a convenient option to trade this index using CFDs (contract for difference).

What is CFD Trading

CFD trading is based on price differences rather than acquiring the asset. The main goal is to gain speculative profits from the differences in underlying assets’ prices. CFDs are an easy and convenient way to invest in the securities market in either direction. Depending on what behavior you expect from the market, you will be able to adjust your strategy accordingly.

Advantages and Disadvantages of CFD Nikkei 225

Those familiar with CFD, in more detail, recognize the many positive aspects of this tool. In many cases, it proves to be more profitable and convenient than trading the underlying asset itself. The benefits include:

  • You can significantly increase your initial capital with leverage
  • Work with both rising and falling market
  • Ability to trade international markets from one account
  • Opportunity to hedge an existing shares portfolio
  • The flexibility of timeframes and contract sizes

Novice traders who want to try trading CFDs should not forget that such trading still has certain risks:

  • Losses associated with excessively large leverage
  • Over-trading because of low capital requirements
  • No rights as a shareholder

FTSE Nikkei 225 Trading Strategies

The Nikkei 225 has gained popularity among CFD traders due to its good volume and volatility. The index has earned a reputation of being the most volatile index due to sharp fluctuations in quotes. Analysts recommend that trading on the Nikkei Index be done by experienced and active traders. At the very least, you should feel prepared for different outcomes.

The index is usually growth-oriented. Sharp drops in value only occur during massive crises, that is, every five to 10 years. Once a year, you can expect it to sink by 10-15%. When trading in a bearish market, stay cautious, and always set up a stop-loss. All the other times, when the market is going up, stick to a bullish strategy. Setting a stop-loss is less crucial but still advisable.

Conclusion

Nikkei 225 Index is a leading stock price index in Japan. If you are looking for an investment tool to diversify your risks, it will be a suitable choice. The Japanese economy is still on the rise, and this directly affects the performance of the index.

With all this information in mind, it's time to use it to your advantage. Register for a free demo account on Libertex and try out your skills in trading any financial instrument. Real practice can only occur in a live market environment. You will familiarize yourself with the technical aspect of our platforms and become equipped to be able to make a good profit.

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