Nikkei 225 Chart
The Nikkei 225 is the primary benchmark index for the Japanese stock market. The size of the Japanese economy (3rd largest in the world) and its importance makes the Nikkei one of the most widely watched and traded indices in the world. The 225 constituents of the index trade on the Tokyo Stock Exchange (TSE). It has a long history, dating back to as early as 1950.
The index is priced in Yen and unlike many indices, it is price-weighted. This means the higher priced securities in the index receive the most weighting. This is similar to how the Dow Jones Industrial Average is calculated, where the sum of the adjusted stock prices is divided by an index divisor to determine the index value. The index divisor method is called the, “Dow adjustment”. For a period of time during the 1970s and 1980s it was called the Nikkei Dow Jones Stock Average.
How to trade the Nikkei 225
The Nikkei 225 contract is traded on a number of exchanges, but the domicile exchange is the Osaka Securities Exchange. It trades under the exchange code, “NK225”. The notional value of each contract is calculated by multiplying the Nikkei 225 times ¥1,000. It is a cash settled contract. Due to the large margin requirements (¥100K+ in August 2016) it can limit the number of market participants who can trade it.
Like other major indices, a miniature contract exists. The mini contract is 10x smaller than the large contract and trades under the exchange code, “NK225M”. Due to its much smaller size, it is more accessible for smaller investors and allows for more precise positon sizing.
Similar to other major global index futures contracts, expiration months are March, June, September, and December.
Exchange Traded Fund (ETF)
There are several ETFs which track the performance of the Nikkei 225. The Blackrock Japan’s iShares ETF, Nomura ETF Nikkei 225, NIKKO ETIF 225, and Daiwa ETF Nikkei 225. The Nomura Nikkei ETF 225 has the largest number of assets. It trades under the Tokyo Stock Exchange ticker symbol – TYO: 1321. The low cost structure and accessibility to all types of investors make ETFs an attractive vehicle.
These are funds which have portfolios which mimic the price fluctuations of the Nikkei 225. They have low turn-over and thus charge lower fees than other types of funds. Index funds are meant for the long-term investor, and not used as an active trading vehicle. Generally, index funds are long-only.
Options are available for both the large futures contract and ETF. It is suggested that one familiarize themselves with how options work before trading them. This is one of the least capital intensive ways to trade the Nikkei 225. Traders can use options as a hedge or to speculate on the direction of the index, both up and down.
Contract for Difference (CFD)
This instrument was designed with the small trader or investor in mind. CFDs are constructed with futures contracts, but made into smaller contracts which require significantly less margin than futures contracts. Just like futures, these trade nearly 24-hours a day, 5-days a week. Most traders in the world outside of the United States have access to a broker who offers CFDs. These can be traded in both directions, long and short.
What impacts the Nikkei 225?
Macro-economic conditions weigh significantly on the index due to its exposure to the global economy. The health of Japan’s key trading partners such as China, the United States, and Europe impacts the Japanese economy due to its heavy reliance on exports to these nations.
The Bank of Japan operates one of the most aggressive monetary policies in the world. Since the early 1990’s, the BoJ has been very active in financial markets in an effort to help boost its economy and asset prices. The central bank uses a variety of tools, including interest rate adjustments and quantitative easing (QE). Part of the central bank’s QE program in recent years involves the purchasing of exchange traded funds (ETFs) in an effort to boost stock market prices.
The Nikkei 225 is made up made up of a few key sectors. As of the end of 2015, technology shares make up a very significant 43.74% of the index, followed by consumer goods at 22.15%, materials 16.20%, capital goods/others 11.04%, transportation and utilities 3.5%, and financials 3.37%.
Even though the Nikkei includes a large number of stocks, it is largely dominated by a small number of its constituents. Of the 225 stocks trading in the index, the top 10 account for over 30% of the index weighting, and thus have a large impact on price fluctuations.