Stock indices are an important part of financial markets and provide information for a basket of stocks, not just one. Created in 1984, by the Frank Russell Company, the Russell 2000 index quickly became a household name. While indices like S&P 500 act as a reference point for large-capitalization stocks, Russell 2000 reflects small-cap stocks in the United States.
Russell 2000 Definition
The Russell 2000 index measures the performance of approximately 2,000 smallest-cap American companies. The index is market-cap weighted, meaning the weight of its components changes relative to the total market capitalization.
The index is operated by FTSE Russell, of the London Stock Exchange (LSE) Group. The subsidiary also maintains other indices that it should not be confused with. The Russell 3,000 index lists the largest 3,000 US companies. The largest 1,000 companies, out of these, are listed on the Russell 1,000 index. The rest, which is small/mid-caps, is a subset of the smaller components within Russell 3,000 and belongs to Russell 2,000.
Understanding the Russell 2000 Companies
The constituents for Russell 2,000 are not chosen by a committee or the groups operating it. Instead, they are calculated according to a formula based on a combination of their market cap and current index membership.
Rebalancing takes place every June on the last trading day. The current composition includes 2,021 stocks; the top-10 companies are as follows:
|Novocure Ltd||Medical Equipment & Devices||0.39%|
|Arrowhead Pharmaceutical||Biotech & Pharma||0.33%|
|Haemonetics Corp||Medical Equipment & Devices||0.31%|
|Generac Holdings Inc||Electrical Equipment||0.30%|
|Teladoc Health Inc||Healthcare Facilities & Svcs||0.29%|
|Amedisys Inc||Healthcare Facilities||0.29%|
|Science Applications Int||Technology Services||0.27%|
|Trex Inc||Construction Materials||0.26%|
|Eastgroup Properties Inc||Real Estate||0.26%|
|Deckers Outdoor Corp||Apparel & Textile Products||0.26%|
Not all types of stocks are considered eligible to be included in the Russell 2000. These are the defining characteristics that all constituents must have – otherwise, they are excluded from the list:
- Must be traded on the U.S. exchanges
- No less than a $1.00 closing price on the rank day in May
- A total market capitalization of no less than $30 million
- More than an absolute 5% of shares available
- No royalty trusts, LLCs, limited partnerships, closed-end investment, and blank-check companies
Factors Influencing the Russell 2000 Index Price
Primarily, the value of the index is affected by whatever happens in the companies listed on it. Investors should also keep an eye on sectors reflected in the index constituents – it could be events occurring in healthcare, finance, technology, energy, etc.
Just like any financial asset, Russell 2000 does not exist in a vacuum. Therefore, multiple interrelated or even seemingly unrelated factors can play a significant role in its value. Since it is a barometer for the U.S. economy, the index receives influences by similar determinants: political news, market corrections, speculative behavior, dollar strength/weakness, demand for certain commodities, etc. It is also essential for traders to be aware of the U.S. geopolitical tensions with other regions, such as China, Middle Eastern countries, and South-East Asia.
Advantages and Disadvantages of Russell 2000
Before you can make the right decision on whether this type of trading is for you, thoroughly research the topic from both sides. Russell 2000 advantages include:
- Presents opportunities on the entire market rather than narrow sectors
- Outperforms bigger indices during periods of falling interest rates
- Offers a higher potential return for investing for investors
- Has the potential to grow easily
Here are the downsides of the Russel 2000 index:
- Associated with higher fees
- More volatile than large-cap stocks
- Appears to be slightly risky
What Is the Russell 2000 Index CFD Trading?
If you want to work with Russel 2000 or venture into financial markets in general, CFDs (Contracts for Difference) might be a match for you. But before that, you need to understand the technical side and consider its benefits as well as drawbacks.
What Is CFD Trading?
CFD is an instrument that lets traders speculate on the price changes across many financial markets such as indices, shares, currencies, bonds, etc. If you make correct predictions, you can profit from rising as well as falling prices.
The main difference of CFDs is that you never actually own the asset you are trading with. Instead of making the full physical purchase or sale, you mimic and receive the same profits (losses) as if you owned them.
Advantages and Disadvantages of CFD Russell 2000
Here are the main reasons to consider CFDs to make a profit on financial markets:
- Flexibility of trading in both directions
- Lower transaction costs
- Tax efficiency
- Ability to open trades with bigger value and leveraged gains
- Access to different types of indices and other assets
The negative aspects include:
- Inherent risks of trading in financial markets
- Leverage may amplify losses
- Not suitable for long-term strategies
Russell 2000 Stocks Trading Strategies
Typically, investors can rely on "financial rules of thumb” to provide guidance for investors. But an interesting fact about trading Russell 2000 is that conventional pearls of wisdom do not apply. With small-cap stock, it's advised to avoid the purest forms of market timing, unless you are a strategic and tactical investor:
- Bullish strategy – It has been noticed that small caps can outperform large ones in bull markets. However, you can expect periods of rising interest rates when the Federal Reserve stops decreasing to stimulate the economy.
- Bearish strategy – The most common advice on the time to purchase small-cap stocks is when the market seems to be going down for a long time. Active investors can benefit from buying at times when the Fed begins raising rates.
Adding small caps to your portfolio diversifies your investments, which is a universally accepted tactic. However, you should always be cautious about investing in any financial asset since past performance does not guarantee future results. Fortunately, platforms like Libertex make it possible to improve your skills without risking real money. By registering a free demo account, you can practice with whatever asset you want and then, you can enter the real market and maximize your gains.
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