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Nikkei Index Trading Explained: How to Trade Nikkei 225

Date Modified: 07/04/2024

Market indices track a selection of stocks to reflect the performance of a specific market segment or a particular economy. A prominent example of a market index is the Japanese Nikkei 225 index. It was previously named the Nikkei Dow Jones Stock Average due to similarities in the index calculation.

NIKKEI 225 Index Illustration.

Main Points:

  • The Nikkei 225 index is the most quoted stock market index used to measure the performance of the Japanese economy
  • The Nikkei 225 was established in 1950 during Japan's industrialization and ongoing rebuild from the world war
  • The companies comprising the Nikkei index are 225 in number. They represent the 36 industries of the Japanese economy. They are further classified into 6 major categories
  • Traders can speculate on the financial instruments that aim to provide exposure to the Nikkei 225 index price. They include Nikkei 225 index futures contracts, options contracts, CFD derivatives based on the index futures, shares CFDs, and ETF CFDs
  • Several factors influencing the Nikkei 225 index price include earnings reports, share prices, and news events

What Is the Nikkei 225 Index?

Nikkei 225 index is a Japanese stock market index used to record and monitor the daily changes in 225 largest and most actively traded shares listed on the Tokyo Stock Exchange (TSE) which is the second largest stock market in the world (as of February 2024).

The value of the index is calculated by a price-weighted methodology, making it similar to the Dow Jones Industrial Average but different from other stock indices like the S&P 500, the FTSE 100, and the Hong Kong 50 index, which are based on market capitalization.

Due to its broad coverage across diverse industries in the Japanese economy and its long-standing as the oldest Japanese stock market index, the Nikkei earned its spot as the most recognized Japanese stock market index.

It is widely known by the following namings - Nikkei, Nikkei 225, Nikkei index, the Nikkei Stock Average, and more commonly Japan 225.

Why Is the Nikkei 225 Index Important to Traders?

  • The Nikkei index is the main benchmark used to analyze the strength of the Tokyo stock market and the Japanese economy, ranked among one of the major financial hubs in the world.
  • The Nikkei 225 index serves as a useful indicator of market sentiments in the East Asian region.
  • Nikkei 225 serves as a financial instrument for traders looking to diversify their exposure to major shares listed on the Tokyo Stock Exchange.
  • The Japan 225 caters to traders who thrive in volatile markets, providing exposure to capitalize on the Nikkei 225 index's frequent price movements.

The History of the Nikkei 225 Index

The Nikkei was established in the post-World War II era when Japan was undergoing economic rebuild and industrialization. Its value was first derived with an initial calculation that reflected the average cost of 250 company shares across different Japanese companies.

After being called the Nikkei Dow Jones Stock Average for over a decade between 1975 and 1985, it adopted a simpler title known as the "Nikkei." This naming was inspired by the Japan Economic Newspaper (Nihon Keizai Shimbun).

The following year, 1986, marked a significant milestone for the Nikkei 225 futures, as it debuted on the Singapore Exchange and was further listed on the Osaka Securities Exchange and the Chicago Mercantile Exchange in 1988 and 1990.

Between 1985 and 1990, Japan experienced a major asset bubble that led to an appreciation of the Japanese yen, tripling both stock prices and real estate value. After the bubble burst, the Nikkei declined from its peak in December 1989, eventually losing over 80% of its value by 2008.

The Bank of Japan (BoJ) and the Japanese government came to a rescue, by introducing economic stimulus that resulted in over 150% appreciation between 2012 to 2015.

Due to the COVID-19 pandemic in 2020, the Nikkei saw another major decline but recovered strongly, surpassing the pre-COVID high at 24,000, and has consistently reached all-time highs above 35,000.

The Composition of the Nikkei 225 Index

The composition of the Nikkei index is consolidated into 6 categories. It comprises 225 top-performing company shares across 36 industries of the Japanese economy. Among the companies influencing the Nikkei index price, are Japanese tech giants like Sony (Japan) 6758.TY, SoftBank 9434.TY, and Panasonic 6752.TY, accounts for the biggest impact on the index followed by companies in the consumer goods, utilities, and transportation sectors.

The index is reviewed annually in September and changes to the composition are made in the following month of October through a procedure called ‘Extraordinary Replacement.’

Top 10 Companies Listed on the Nikkei Index

Here are the top 10 performing Nikkei index stocks, as of February 2024:

No

Name

Share Price

1

Hitachi Zosen Corp.

¥1,251.00

2

Yaskawa Electric Corp.

¥6,182.00

3

Otsuka Holdings Co. Ltd.

¥6,074.00

4

Hino Motors Ltd.

¥495.10

5

Japan Steel Works Ltd.

¥2,683.50

6

Kobe Steel Ltd.

¥2,130.50

7

Sumitomo Pharma Co. Ltd.

¥368.00

8

Nippon Steel Corp.

¥3,728.00

9

JFE Holdings Inc.

¥2,497.50

10

Tokyo Gas Co. Ltd.

¥3,361.00

How to Trade the Nikkei 225 Index

  • The Nikkei 225 is an index with a numerical value but no underlying asset. However, there are financial instruments, each with unique features, providing exposure to the fluctuations of the index price. To trade the Nikkei 225 index, you can do the following:
  • Trade the Nikkei 225 Index Futures
  • Trade the Nikkei 225 Index CFDs
  • Trade the Nikkei 225 Index Options
  • Trade the Nikkei 225 Constituent Shares
  • Trade the Nikkei 225 Index ETFs

How to Trade Nikkei 225 Index Futures

Nikkei 225 futures contracts are agreements to buy or sell the index futures at a set price on an expiration date. There are four (4) contract months namely March, June, September, and December. Trading for a new contract month starts on the day after the previous contract expires.

Unlike most futures, market participants do not receive any asset at the expiration date of a contract month because the Nikkei index is just a numerical value and does not have any underlying physical asset. However, traders can incur a profit or loss if their prediction of the index price is right or wrong.

How to Trade Nikkei 225 Index CFDs (Japan 225)

Japan 225 NIY is the ticker used to represent the Nikkei 225 index CFDs.

When trading Japan 225, you are engaging in Contracts for Differences (CFDs) based on the futures price of the Nikkei 225 index. This provides traders with the flexibility to speculate on the price movements of the Nikkei index without the need to deal with the obligations associated with trading a futures contract.

How to Trade Nikkei 225 Index Options CFDs

With Nikkei 225 options contracts, you have the right, but not the obligation to buy or sell the Nikkei index futures at a predetermined price on an expiration date.

You can also trade Nikkei 225 call or put options CFDs* based on its futures price by putting down a small deposit to control larger position sizes, which can amplify both potential profits and losses.

Trade on Individual Nikkei 225 Stocks

An alternative way to gain exposure to the Nikkei index is by trading any of its constituent stocks, such as Nintendo Corporation, Toyota Motors, Mitsubishi Group, etc.

With share CFDs*, traders can speculate on the price movement of any Nikkei index constituent stock without owning the actual shares.

Trade on Nikkei 225 ETFs

Similar to share CFDs, traders can also gain exposure to the Nikkei index by trading ETF CFDs*.

With Nikkei index ETF CFDs, you can speculate on the price movement of specific Exchange Traded Funds (ETFs) tracking the Nikkei index without investing in the fund itself. However, trading Nikkei ETFs CFDs tends to incur higher spreads due to lower liquidity.

What Is Nikkei 225 Index Trading Hours

You can engage in Nikkei index (Japan 225) trading as well as monitor its real-time fluctuations on the Plus500 WebTrader platform. Nikkei index is available for trading on the trading platform everyday between 00:00 and 23:00 CET (meaning there is only 1 hour break between 23:00 to 00:00 CET).

*Please note that trading platform hours depend on the individual operator.

*Availability is subject to operator

Factors Affecting Nikkei 225 Index Price

Share Price: The Nikkei index is price-weighted, implying that certain stocks significantly impact the index more than others. The tech sector is a typical example that can cause significant fluctuations in the price movement of the Nikkei index.

Quarterly Reports: Public companies release quarterly reports on performance, earnings, and other crucial data. These reports can cause significant fluctuations in the Nikkei index price.

News Reports: Since the Nikkei index reflects the strength of the Japanese economy, geopolitics and economic news reports like inflation, interest rates, gross domestic product (GDP), etc. can also impact the direction of the index price movement.

US Economy: Japan relies heavily on exports, primarily to the United States. Therefore, political events and important US economic reports, such as its monetary and fiscal policies, can directly impact Japanese businesses. This, in turn, may affect the performance of the Nikkei index, representing the Japanese stock market.

Currency Rates: A strong Japanese yen tends to make Japanese exports more expensive which leads to purchasers looking for countermeasures or alternatives. This may lead to the depreciation of Japanese stocks and consequently the Japanese index. On the other hand, a weaker yen increases demand for Japanese exports. This tends to strengthen Japanese stocks and consequently the Nikkei index.

Natural Disasters: Japanese stocks are vulnerable to natural disasters that occasionally plague Japan, such as tsunamis and earthquakes. The occurrence of such natural disasters may result in significant dips in the Nikkei index.

Steps to Buy and Sell Nikkei 225 Index CFDs

To begin trading Nikkei 225 index CFDs (Japan 225), you can take the following steps:

Why Trade Nikkei Index (Japan 225) with Plus500

Leverage: Leverage can amplify your profits or losses, since greater potential rewards come with greater potential losses.
Convenience: You can trade the Nikkei 225 index at your convenience, anytime and anywhere, using Plus500 WebTrader on your desktop, iPhone, or Android device.
Liquidity: Nikkei index high liquidity translates to swift order execution, ensuring your trades are filled promptly at your desired price.
Spreads: Plus500 offers competitive pricing, featuring tight spreads. However, be mindful of additional fees that might apply during your trades.

Conclusion

This article has provided detailed insights into the basics of trading the Nikkei 225 index, from its importance and composition to the varying financial instruments that provide exposure to the index. In addition to adequate risk management, traders can utilize a wide array of trading tools such as advanced charts, technical indicators, and trading alerts to make better trading decisions and improve trading performance.

FAQs

Who owns and manages the Nikkei 225 Index?

The Nikkei 225 index is owned and managed by the Japanese media organization, Nikkei Inc. The Nikkei index is updated every five seconds to show the latest price movements.

What are some other Japanese indices?

There are several other notable Japanese indices, including Nikkei Asia300, Nikkei Stock Index 300, JPX-Nikkei Index 400, Nikkei 500 Stock Average, and Nikkei Japan 1000. These indices provide diversified perspectives on different segments of the Japanese stock market.

How does the US market impact the Nikkei Index?

When the Dow performs well (representing the US market), investors might become more optimistic about global markets, potentially leading to a rise in the Nikkei the next day, especially early in the trading session. Conversely, poor performance in the US market can lead to a decline in the Nikkei.

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