What is Nikkei 225?

The Nikkei 225 is the stock market index of Tokyo Stock Exchange. It comprises of 225 blue-chip companies and presents a global trading opportunity for investors. With its inclusion of prominent Japanese companies, it serves as a valuable addition to portfolios, particularly for diversification and capitalizing on market gains. 

In this guide, we discuss Nikkei 225 in-depth and how traders can invest in it. 

Understanding the Nikkei 225

Established in 1950, Nikkei 225 is one of Japan's benchmark indexes for the Tokyo Stock Exchange. The index consists of 225 renowned publicly traded companies across various industry sectors such as technology, pharmaceuticals, retail, finance, and more. 

Nikkei 225 reflects the performance of the overall Japanese market as the index serves as a benchmark. 

Also known as the Nikkei Dow Jones Stock Average, it is reviewed once a year in October. Traders prefer trading the Nikkei index as it is renowned for its volume and volatility, attracting numerous day traders seeking to capitalize on short-term price movements.

Just like the Dow Jones index, the Nikkei 225 is also a price-weighted index. That means the whole index is the average of the share prices of all the different companies listed on the index. Since every company’s stock is weighted according to its share price, the Nikkei gets influenced by the higher priced stocks. For instance, the tech industry makes up for the most weightage in the index and that directly means any big fluctuations in the share prices of the major tech industries can directly affect the Nikkei 225 Stock Average Index. 

Here are the opening hours for the Nikkei 225 index:

• Morning Session: The morning session begins at 9:00 a.m. and continues until 11:30 a.m. During this time, regular trading takes place, and buyers and sellers can execute trades in the Nikkei Index and other listed securities.
• Lunch Break: There is a lunch break from 11:30 a.m. to 12:30 p.m. No trading occurs during this period.
• Afternoon Session: The afternoon session commences at 12:30 p.m. and concludes at 3:00 p.m. Like the morning session, this period allows for regular trading activities.

History of Nikkei 225

Nikkei 225 was first introduced on the 9th of July, 1950, and administered by the Tokyo Stock Exchange. However, in 1970, the Nikkei financial newspaper - Nihon Keizai Shimbun, took over the index’s administration. 

During the peak of the Japanese asset price bubble in December 1989, the index reached an all-time high of nearly 38,916. However, it has never reached those levels again since then. In fact, it ended up falling by over 38% in 1990. 

Top 5 derived indexes from Nikkei 225

• Nikkei 225 Total Return Index: Measures the performance of the Nikkei 225 index, including dividends and other income from constituent stocks.
• Nikkei 225 Covered Call Index: Tracks the performance of the Nikkei 225 index while incorporating a covered call strategy, where call options are sold against the underlying stocks to generate income.
• Nikkei 225 Risk Control Index: Aims to manage risk by adjusting the weightings of stocks in the Nikkei 225 index based on market volatility.
• Nikkei 225 Leveraged Index: Provides amplified exposure to the Nikkei 225 index by utilizing leverage, allowing investors to potentially magnify gains or losses.
• Nikkei 225 Inverse Index: Moves in the opposite direction of the Nikkei 225 index, designed to provide a hedge or profit during market downturns by tracking inverse performance.

Why trade the Nikkei 225?

Investing in the Nikkei 225 index could help both domestic and foreign traders diversify their investment portfolios. The index provides exposure to the Japanese market, which contributes significantly to the Asian market. 

Traders can monitor the performance of the Japanese economy by tracking Nikkei 225's overall performance. 

The Nikkei 225 presents unique advantages for investors. Firstly, it offers diversification by encompassing 225 leading companies across various sectors. This enables investors to mitigate volatility and spread risks, without relying heavily on a single stock's performance. Additionally, the index boasts high liquidity due to its active trading volumes, ensuring successful trading experiences. 

Moreover, trading the Nikkei 225 often incurs lower transaction costs compared to individual stock trading, since investors trade several stocks simultaneously rather than trading each stock individually. This reduces the number of transactions being made and allows traders to capitalize on short-term market trends.

How can Nikkei 225 be traded?

Buy the Nikkei 225 index 

Investors can buy stocks of Nikkei 225 companies directly through brokers or online trading platforms.  

CFDs

Investing in the Nikkei 225 through a Contract for Difference (CFD) allows traders to gain exposure to  the Japanese stock market without owning the underlying assets. CFDs are financial derivatives that enable investors to speculate on price movements of the Nikkei 225 index, either by going long (buying) or going short (selling) the CFD.

A step by step guide  on  trading  Nikkei 225 via CFDs –

1. Look for a reputable and regulated CFD broker that offers the Nikkei 225 as a tradable instrument.
2. Sign up and open a trading account with the chosen CFD broker.
3. Fund the trading account by depositing the desired amount of money and also get familiarized with the broker's trading platform.
4. Select the Nikkei 225 CFD within the trading platform. It is usually listed as Nikkei 225 or JP225. Select the instrument to proceed with trading.
5. Conduct market analysis to assess the current and potential future movements of the Nikkei 225 through technical and fundamental trading analysis.
6. Determine trade parameters (position size, long/short preference) for the Nikkei 225 CFD. Enter the trade on the platform with price and additional parameters (stop-loss, take-profit, etc.).
7. Once the trade is open, monitor the market and manage positions accordingly.
8. When the trader decides to exit the trade, they can close their position through the trading platform. Their profit or loss will be realized based on the difference between the opening and closing prices of the CFD.

Futures

The Nikkei 225 futures contract represents an agreement between buyers and sellers to trade a predetermined quantity of the Nikkei Stock Average (Nikkei 225) at a future price. It serves as an underlying asset for this futures contract. Nikkei 225 serves as an underlying asset for this futures contract. These futures contracts are available for trading on the Japanese Exchange Group and quoted in Japanese Yen.

Exchange Traded Funds 

Several ETFs track Nikkei 225's performance, allowing traders to trade Nikkei 225 with a diversified approach. The ETF is designed to track the performance of the Nikkei 225 index by holding a diversified portfolio of securities that mirrors the index's composition. Traders can trade these ETFs throughout the day at market prices, getting higher exposure to the market.  

Factors that affect the Nikkei 225 price

Currency exchange rates

Nikkei 225 has an inverse relationship with Japanese Yen. When Yen goes up, Nikkei 225 index goes down–and vice versa. That is because when Yen goes up, Japanese exports relatively more expensive and potentially hamper the profitability of export-oriented companies in the index.

Economic events 

When Japan makes changes to its fiscal or monetary policies, such as adjusting interest rates, managing inflation, or affecting the unemployment rate, these actions can directly impact the prices of the Nikkei 225.

Share prices of companies

When share prices of companies that have a higher weightage in the index fluctuate, the Nikkei index’s prices fluctuate as well.

Earning reports 

The release of quarterly or annual performance reports of companies, particularly those with significant weightage in the index, has the potential to influence the prices of the index.

Bank of Japan policies

Expansionary BoJ policies, such as lower interest rates or quantitative easing, can provide liquidity and stimulate economic activity, potentially benefiting the Nikkei 225. Conversely, contractionary BoJ policies or unexpected policy shifts can create uncertainty and have a negative impact on the index.

Top Nikkei 225 companies

There are a total of 225 companies that are listed on the Nikkei 225 (and that’s how the index gets its name). These companies are spread across 35 different industries. Every stock present on the index is measured according to its performance. 

The tech industry has the largest weightage in the index, followed by consumer goods, financials, capital goods, materials, utilities, and transportation industries. 

Some of the companies that are a part of the Nikkei 225 include:

• KDDI Corporation: A leading telecommunications company in Japan, providing mobile, fixed-line, and internet services to a wide customer base.
• Sumitomo Mitsui Financial Group: One of Japan's largest banking and financial services groups, offering a comprehensive range of banking, leasing, and asset management services.
• Shin-Etsu Chemical: A major global chemical company specializing in the production of a diverse range of chemical products, including semiconductor materials, PVC, and silicones.
• Recruit Holdings: A diversified business services company involved in various industries, including human resources, media, advertising, and travel, operating both in Japan and internationally.
• Hitachi: A multinational conglomerate known for its diverse portfolio of products and services, including information technology, infrastructure systems, power equipment, and automotive systems.

TOPIX vs Nikkei 225

TOPIX or the Tokyo Price Index is another index on the Tokyo Stock Exchange, apart from the Nikkei 225. While Nikkei is a short selection of 225 stocks from the Tokyo Stock Exchange, TOPIX includes all the stocks that are present on the TSE. 

Also, while Nikkei 225 is a price weighted index, TOPIX uses capitalization weighted methods for the stocks present in TSE’s first section. In a capitalization weighted index, the companies with a higher market capitalization receive a higher weightage and the companies with a smaller market capitalization will have lesser impact on the performance of the overall index. 

How to trade the Nikkei 225? 

It is possible to trade Nikkei 225 through CFDs which allows traders to take up a position on the index without actually owning the underlying assets. 

A guide to trade Nikkei 225 CFDs

1. Sign up for a live trading account on Blueberry.
2. Upload the required identification documents to get the application processed and approved
3. Once the trading account is active, fund the account. There might a minimum required deposit amount which is why it's important to check all the terms and conditions
4. Download a trading software like MT5
5. Open the charting tool. Go to Indices and select JP 225 to trade the Nikkei 225

Final words

For traders that want to increase their exposure into the Japanese stock market, Nikkei 225 can be a good market to start with. The biggest advantage of the index is that traders get a basket of blue-chip stocks without having to trade each stock individually.