Widely regarded as Japan's version of the Dow Jones Industrial Average and a barometer of the economic status of Japan, the Nikkei 225 stock average, N225 or JPN225 gathers real-time volume of the top 225 blue-chip corporations listed on the Tokyo Stock Exchange.
Although traders cannot invest money directly to the Nikkei 225 as it is a form of an index or indices, investors can gain exposure to the stocks covered by the Nikkei 225 via CFD trading and an exchange traded fund (ETF). The Nikkei 225 stock average is similar to the Dow Jones Industrial Average because it is a price-weighted equity index. Unlike other major indexes that ranks companies by market capitalization, the Nikkei positions its companies by stock price.
The JPN225 is an asset that can be traded on the eToro online investment platform. Trading indices may seem daunting for beginners but this article will go over all the critical details you need to know. Read on for more information about trading Nikkei 225.
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History of Nikkei 225
The broadsheet daily Nihon Keizai Shimbun (the Nikkei) started calculating the Nikkei 225 on September 7, 1950. Since January 2010, the index began updating every 15 seconds per trading sessions. The price of the Nikkei 225 reached all-time high on December 29, 1989 when it peaked at 38,957.44 points coinciding with the Japanese asset price bubble.
It's price eventually went down by 81.9% to 7,054.98 points by March 2009. Since then, the Nikkei saw its value cracking the 10,000 mark when it reached 15,942 in May 2013, followed by another surge taking it over the 20,000 mark in 2015 before stabilizing in the 22,000 range in 2018.
On February 15, 2021, the Nikkei achieved its highest level in more than 30 years when it surpassed the 30,000 mark mainly because of the levels of asset purchase programs and stimulus aid granted by the Bank of Japan to offset the economic effects of the COVID-19 global pandemic.
How is Nikkei 225 Calculated?
The Nikkei 225 shares the same characteristics as the Dow Jones Industrial Average and is calculated in real-time by taking the sum of adjusted prices and dividing them by a divisor. This is used to maintain continuative prices in the market despite external factors, which are not directly related to the market's movement. The value of the stocks are given greater importance in this index.
It's components are annually reviewed in early October by a committee who takes into consideration the liquidity of the market and the balance between sectors.
Nikkei 225 Index Composition
Although most of the companies featured in the Nikkei 225 list are Japanese-based, almost all are known worldwide. Japanese companies like Nissan Motor Co. (NSANY), Canon Inc, (CAJ), Panasonic Corp. (PCRFY), Toyota Motor Corp. (TM), Honda Motor Co. (HMC), Mazda Motor Corp. (MZDAY), Sony Corporation and Daikin just to name a few, represent a diverse companies engaging in at least 36 various industries.
Factors to Consider When Trading Nikkei 225
The Nikkei is a generally safe investment thank to being of the world's oldest and most established indices in the financial market today. Still, it is not immune to volatility. Historically, the Nikkei 225 price index has shown to hit a steep decline following a natural calamity. For example, the Nikkei dropped 10% minutes after a 9.1 magnitude earthquake hit Japan in March 2011. Although the Nikkei 225 recovered fast enough, traders should always be on the watch for any political, economic and even environmental events.
How to Trade Nikkei 225?
It's important for you to know that the Nikkei 225 is only available to those in Japan so if you are from another country then you will not be able to participate directly. Your next best option is by investing ETFs, futures and CFDs that track the Nikkei index. However, the easiest way to trade indices is through CFD trading or contracts for difference.
Trading Nikkei 225 via ETFs
An ETF that tracks the composition or performance of the Nikkei 225 is a possibility for traders. They consist of individual stocks which are traded like shares at particular times during the day. Each ETF can be designed to track a certain market (such as the Nikkei) or to focus on low risk investments. Exchange-traded funds are built by financial companies and have a team of experts who tailor them to meet their specific needs. Meanwhile, you should be aware of the monetary risks and other risk factors when investing in this kind of product.
Trading Nikkei 225 via Futures
Futures contracts are one of the most common derivatives for trading Nikkei 225. They enable you to trade the futures market from a single point, without risking too much capital because you can set a limit order on the contract. All leading companies are available for trading and it's a great way to take a position in Japanese shares, no matter how big or small. Nikkei 225 contracts are different from other futures contracts in that they do not take the form of a physical, tangible product. Instead, they determine the price of stocks that make up that index.
Trading Nikkei 225 via CFDs
Contracts for difference (CFDs) are financial instruments that permits investors to earn from the price movements of an asset or a security without having to own an underlying security or asset. When trading CFD, an investor enters an agreement with a broker to exchange the difference in the price of the asset from the point when the contract started to the point when the contract is closed.
Traders get more investing wiggle room in CFD trading because they can trade in both directions. Investors are drawn into the possibility of profiting from both the upward and downward price movements of an asset in CFD trading. If a trader believes an index price is going to increase, they can buy a CFD and go long. If they foresee an index price to drop, they can sell a CFD and go short.
With CFDs, you can maximize the "leverage" feature to trade a bigger amount of investment money than your deposited fund. You can use Leverage to work in your advantage by potentially raising the ceiling on your trading profits. That said, leverage can also multiply your losses, so it is important to be knowledgeable about the application of leverage in CFD trading and be aware of its risks.
Trading Nikkei 225 CFDs with eToro
To get more exposure to the Nikkei 225 index, investors can trade by engaging in the trading method of contract-for-difference (CFD) trading using a brokerage platform such as eToro.
By speculating on the price movements of the stocks of companies listed on the Nikkei 225, traders can maximize full exposure in exchange of investing only a small amount (referred to as margin) despite not taking ownership of any financial assets.
How to Trade Nikkei 225 in eToro?
Just follow these steps when placing a Nikkei 225 index trade on eToro:
- Create an account on eToro or log-in your account for existing users.
- Click "Discover".
- Select "Indices".
- Look for "JPN225".
- Select BUY or SELL.
- Key in your desired amount to invest or the number of JPN225 units you want to trade.
- Review and set the stop loss, leverage, and take profit parameters.
- Select "Open Trade".
Is It Wise to Invest in Nikkei 225?
Traders have been praising the Nikkei 225 for being an effective means of diversifying a portfolio while also providing some exposure to the Japanese market. If you're thinking of buying Nikkei 225 stocks, consider learning about the four types of trading styles in order to better understand which is right for you. They are day trading, scalping, swing trading and position trading. You can also copy trading styles of some of eToro's experienced traders and get a good idea on how they approach index trading.
Ready to trade JPN225 with eToro?
eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 78% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
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