What are stock market Indices and stock market sectors?

Indices represent the value of a group of stocks, within a stock market, so that the trend of a specific industry within the market can be identified or a specific group of stocks. The most commonly used indices, are those that represent the value of the largest companies on an exchange.

For example, the regularly quoted index is the Dow Jones Industrial Average (DJIA) which tracks the performance of the 30 large companies listed on the NYSE. 

The value of any index is irrelevant except in relationship to itself, as it's value is not transferable, therefore you can only compare the value of any index against itself over a period of time. 

Major indices across the world:-

S&P 500 from the NYSE, 

NASDAQ, 

FTSE 100 Index (UK); 

Hang Seng Index (Hong Kong), 

Nikkei (Japan), 

Straits Times Index (SGX), 

Kuala Lumpur Composite Index (Malaysia), 

S&P/TSX Composite Index (Canada) 

All Ordinaries Index (Australis)

S&P 200 (Australia)

It is important to understand that indices have a limitation that it is they are a weighted average of market capitalisation by the largest companies in the group.

Therefore be sure to understand what companies are within an index, especially if using a secondary index. As some secondary indices can represent only a couple of companies due to their large size when compared to other companies in the index.

What is Global Industry Classification Standard (GICS)

GICS is a joint Standard & Poor’s/Morgan Stanley Capital International product, aimed at standardising definitions of industry sectors across the world’s markets. This is being adopted and implemented by markets which categorising companies the same way around the world which allows investors to compare industries in other countries with similar industries in your own country. You still can't compare the number but you can compare the trend of each index.

10 sectors of GICS:

• Consumer discretionary
• Consumer staples
• Energy
• Financials
• Health care
• Industrials
• Information technology
• Materials
• Telecommunications
• Utilities

While this is the core set of indices some stock changes added additional indices  to accommodate for special groups of stocks within that market wether it be technology, property or something else.

How to use this in your trading strategy?

The idea of an index as part of your trading strategy is that it quickly shortens the number of stocks to consider trading.

A traditional investment approach is that you buy shares of the strongest trending companies in the strongest trending industry sectors. 

The reason is that the sharemarket goes through cycles where certain industries perform well, but others do not, as the economy of the country changes. So you need to stay on the winning trend.

To functionally bring this into your trading strategy you may develop a rule that you only buy stocks in as index where the stock and index is trending in the same direction. 

While this might sound very simple and not clever enough for your strategy, it's simplicity is it's strength. Coupled with a buy signal like the MACD you could have a very simple and successful trading strategy for your primary market.