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The Nikkei index is a key barometer of the Japanese economy, and consists of 225 Japanese companies. Also known as the“Japan 225”, it is the main index of the Tokyo Stock Exchange (TSE). The Nikkei, like the Dow Jones 30, is a price-weighted index, calculated according to the value of its components.
Most main indices are calculated based on the market capitalization of their stocks, making them “capitalization-weighted indices”. Any movements in the prices of major stocks strongly affect the overall value of both the Nikkei 225 and the Dow Jones. For this reason, analysts often consider these indices poor indicators of the strength or weakness of their respective national economies.
Nikkei Inc. decides annually whether companies listed on the index should be replaced based on a procedure called “Extraordinary Replacement”. Some sectors of activity, such as Technology, are over weighed, meaning that the stock prices of the largest tech companies have a disproportionate effect on the overall value of the index, while others – like Consumer Goods and Services – are under weighted.
To trade the Nikkei 225, many market participants turn to stock index brokers. For example, UFX’s index trading platform enables traders to profit regardless of the market’s direction. With this leading CFD broker, traders have the option of opening positions when the markets both rise and fall.
The value of the Japanese currency, the Yen (JPY), is a key factor to consider when trading the Nikkei 225. The Japanese economy is heavily dependent on exports, and every movement in the value of the JPY will therefore impact the prices of goods and services exported by Japan,making them either more or less expensive abroad.
The Yen and the Nikkei have an inverse relationship, also known as a negative correlation.When the JPY falls, exported products become cheaper, pushing Japanese stock prices up,as domestic companies become more profitable. Conversely, when the JPY rises, exported products become more expensive for consumers in foreign markets, who then turn to local products or other cheaper international brands.
When investing in the Nikkei 225, it’s important to be aware of factors like market volatility. The Yen is strongly affected by political, economic, and social uncertainty, which in turn, impact the Nikkei 225. However, many traders consider the Japanese Yen to be a strong currency, representing a solid and resilient economy. It is therefore seen as a safe haven currency which can maintain its value even during times of market turbulence.