The Ultimate Guide to
Trading the Nikkei 225 Index: What is the Nikkei 225
The Nikkei Index, also known as the Nikkei 225 in reference to the total number of components, is a market index used as a measure of the Tokyo Stock Exchange.
It is the most popular and quoted indices of Japanese equities and its name is derived from the Nihon Keizai Shimbun newspaper which has been responsible for the calculation of the index since 1950.
It is the Japanese equivalent of the American Dow Jones Industrial Average, and for a while (from 1975 to 1985), it has even been referred to as the Nikkei Dow Jones Industrial Average.
The Nikkei 225 Constituents
The 225 components of the Nikkei Index as at February, 2017 include 11 food companies, 10 automotive companies, 5 textiles and apparel companies, 5 precision instrument companies, 3 pulp and paper companies, 3 manufacturing companies, 17 chemical companies, 2 fishery companies, one mining company, 9 construction companies, 7 trading companies, 8 pharmaceutical companies, 8 retail companies, 2 oil and coal product companies, 11 banks, 2 rubber product companies, 8 glass and ceramic companies, 3 securities companies, 6 steel product companies, 6 insurance companies, 12 non ferrous metal companies, 5 real estate, 1 other financial service company, 8 railway companies, 16 machinery companies, 2 other land transport companies, 3 marine transport companies, 1 air transport company, 1 warehousing company, 28 electrical machinery companies, 6 communication companies, 3 electrical power companies, 2 gas companies, 9 services companies and 2 shipbuilding companies.2
Due to the large number of components, the Nikkei Index can be used as a reliable indicator of the state of the Japanese economy and as a measure of investor sentiment.
Nikkei 225 Selection Criteria
Components could be changed during an annual review called a Periodic Review, or upon delisting of a component company through an Extraordinary Replacement. The constituents of the Nikkei are reviewed on an annual basis every autumn and if a change is decided, it normally takes place in October.
The selection criteria is based on two main factors:
Additionally, to be considered for selection, the constituent must be listed on the Tokyo Stock Exchange First Section and must be an ordinary share.
*The top 5 performing stocks in the Nikkei Index:
1. T&D with a price of 1924, an increase of 5.02%
2. Alps Electric with a price of 3490, an increase of 3.87%
3. Sony with a price of 3661, an increase of 3.65%
4. Nomura with a price of 767, an increase 3.58%
5. All Nippon Airways with a price of 348.90, an increase of 3.56% 5
*as at time of writing: April 2017
How Is The Nikkei 225 Calculated
The Nikkei Index is price weighted, which means that each stock proportionately affects the value of the index according to its price.
The index value is calculated by adding up the prices of the components and dividing them by the total number of components, in this case, 225.
How To Trade The Nikkei 225
While it is not possible to trade directly on the Nikkei Index, investors can make use of either Futures, Options, Contract for Difference (CFDs) or by charting the market.
Trading Nikkei 225 With A CFD Broker
CFDs are tradable instruments that represent the difference between when a contract is entered and when it is exited, this allows for gains or losses when the underlying index (in this case, the Nikkei Index) moves.
The advantages of trading the Nikkei Index as a CFD include, a higher leverage as CFDs traditionally have lower margin requirements than other methods of trade, access to a variety of markets on the same platform, a variety of trading options and little or no brokerage fees.
For example, Plus500 currently offer the Nikkei 225 CFD (Japan 225 (NIY)) for a 19,686 Buy price and a 19,668 short price and up to 1:300 leverage.
This means that a trader would only require an account size 65.62 to purchase one contract of the Nikkei 225 Index. (19,686/300=65.62)
It is important to note however that leverage can go both ways and amplify both losses and profits.
In summary, trading the Nikkei 225 as a CFD has one the lowest capital requirements for a trader.
