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Instrument description

One of the most dominant index markets in Asia is the Nikkei 225, also referred to as Japan 225. The Nikkei 225 is the benchmark index that tracks and monitors 225 of the largest companies that are listed and actively trade on Japan’s premier stock exchange that is the Tokyo Stock Exchange (TSE). The Nikkei 225 Index was formed in 1950 and served to be an indicator of the growth and value of the Japanese economy.

The Nikkei Index includes 225 domestic companies that operate in various sectors of the market, and the index list is reviewed once every year. Nikkei 225 Index is known for its wide trading volume, highly liquid stocks, and volatility.

History of Nikkei 225 Index

Nikkei 225 is a short form of Japan’s Nikkei 225 Stock Average and represents Japan’s top 225 companies, and the index is followed all over the world by traders and investors. Unlike other global indices, the Nikkei 225 is a weighted price index and the equivalent of Dow Jones Industrial Average in the United States.

The TSE was formed in 1878 and served to be a center for the transaction of gold and silver currencies and bonds. It was not until 1920 that the TSE started trading in stocks. In 1943, the Japanese government decided to merge the TSE with the other five other exchanges to establish a unified Japanese Stock Exchange. But the new unified exchange closed in August 1945, which also marked the end of the Second World War. The TSE was reopened according to the Securities Exchange Act on May 16, 1949.

Apart from being called Japan 225, the Nikkei 225 Index is also termed as the ‘Nikkei Dow Jones Stock Average’ from the period of 1975 to the end of 1985. The Japan 225 Index is named after the Japan Economic Paper, ‘Nihon Keizai Shimbun’ that sponsored and helped in calculating the value of Nikkei 225 Index. The price of the Japan 225 index is measured since 1950, and in Asia the Japan 225 index is the oldest functioning stock market index.

The Nikkei or Japan 225 Index was formed to help in the reconstruction and rebuilding process of Japan after the massive damage the country suffered during the 2nd World War. The valuations in the Nikkei Index are valued in Japan’s official currency ‘Yen’ (JPY), which is included in the top four major currencies in the world, along with U.S Dollar, Euro, and Great Britain Pound.

The Nikkei 225 Index is composed of a wide mix of companies that function in nearly every sector, such as electronics, consumer goods, transportation, energy, financials, and utilities. The companies listed in the Nikkei 225 are recognized worldwide due to their innovation and technological prowess such as Toyota Motors Corporation, Sony Corporation, Honda Motor Company, Nissan Motor Company, Canon Inc., Nippon, NTT Docomo, Mitsubishi Motors Corporation, Meiji Holdings, Nikon Corporation, Bridgestone Corporation, Yahoo Japan Corporation, and Panasonic Corporation.

The performance of the 225 companies in the Nikkei 225 Index is reviewed in September, and any changes usually happen in October every year. The Nikkei 225 touched the milestone of 20000 points in 2015. The Nikkei 225 Index reached an all-time high value of 38,915.87 on December 29, 1989, and the lowest value ever recorded was 85.25 happened in July 1950.

How the value of Nikkei 225 is calculated

The Nikkei 225 is a weighted price index, unlike other global indices that are mostly market-capitalization-weighted. In a price-weighted index, the price of the index is the average of the share prices of all the companies in the Nikkei 225 index. The Dow Jones 30 is another example of a price-weighted index. As Nikkei 225 is a price-weighted index, the high valued technology stocks tend to influence the price of the index.

To measure the value of the Nikkei 225 Index, the sum of stock prices of the companies is taken, adjusted by presumed par value, and then divided by the divisor.

Nikkei 225 Stock Average = Sum of the adjusted stock prices of constituents / Divisor

The Nikkei 225 Index uses the same method to calculate the value like the Dow Jones, and the Divisor is called ‘Dow Adjustment.’ The divisor also serves the purpose of removing any external factors that do not directly affect the direction and value of the index. The Nikkei 225 Index is reviewed once a year, and companies are analyzed based on their liquid stocks and market performance in a particular sector of the market.

How to read the price change in Nikkei 225

The Nikkei 225 Index is followed by traders as the index offers wide exposure to a variety of stocks and consistent day to day fluctuations. The Nikkei 225 Index can also be traded with derivatives instruments where you can trade the underlying asset without having to buy the asset. The Nikkei 225 is known for its volume and volatility as compared to other global indices. The price of the Nikkei 225 is calculated in real-time every 5 seconds during the hours when the TSE is open for trading.

If we look at the Nikkei 225 Index chart, we see the Index trades in a stable way and from the range of 20000.00 to 24000.0 points from mid-July 2019 to the last week of February 2020. The Nikkei 225 Index recorded the highest value of 24087.05 on January 22, 2020. There is a sudden downward trend since the last week of February, and the Nikkei 225 Index dipped at the lowest value of 16518.24 on March 19, 2020. There have been constant fluctuations since March, and Nikkei 225 index currently trades at 22614.70 JPY. The Bid price is 22503, while the Ask price is 22488.

How to trade in Nikkei 225

Like other global indices, the Nikkei 225 Index cannot be bought or sold like a stock. There are several ways to invest in the Nikkei 225, such as through Exchange Traded Funds (ETFs), Options, Contract, and Contract for Difference. The Nikkei 225 Index allows traders to try to take advantage and profit from the short term price movements if the prediction is correct. All the 225 companies in the Nikkei 225 Index are listed on the TSE. The trading hours of the Nikkei 225 Index are from Monday to Friday and in two sessions from 9:00 to 11:30 and 12:30 and 15:00 (GMT +09:00).

CFDs are a popular way to invest in the Nikkei 225, and it’s a contract between a broker and trader where the trader tries to gain from the price difference of the underlying asset from the start to the end of the trade. The trader has the option to use leverage, which means opening a relatively larger trading position by depositing a small amount in the trading account.

With CFDs, trading can also be done both directions, which is going Long or Short. If the trader thinks the index will see a move in an upward trend, then he will go Long (Buy), and conversely, if the trader believes the market will move in a downward trend, then he will go Short (Sell). There is an equal chance of making a profit or suffering a loss, so the trader must trade carefully and may want to implement a risk management strategy.

What causes the price change of Nikkei 225?

The Nikkei 225 is regarded as one of the most volatile index markets in the world as it sees sharp market swings, and the index value constantly plunges and then recovers. The macroeconomic factors and individual performance of the companies influences the overall value of the market. The Japanese Yen pairing with U.S Dollar is also one of the prime factors that determine the price of the Nikkei Index. Traders are often advised to closely watch the performance of U.S markets as it has a direct influence on the Nikkei Index.

The Nikkei 225 Index is sensitive to global events, regional political situation, the economic health of Japan, and weather events such as earthquakes, tsunamis, and typhoons that frequently affect Japan. The macroeconomic factors that influence the Nikkei 225 Index are interest rates, inflation, Gross Domestic Product (GDP), and unemployment rate.

The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.