A Complete Guide to Online Indices Trading

27 July 2022

An increasing number of traders is interested in indices markets and CFD trading. Indices measure how a group of stocks performs. The idea is to focus on how strong and healthy a market is overall rather than focus on the growth of a single company individually. Indices are also referred to as stock indices or share indices. All in all, traders usually choose to trade indices since no single company can greatly impact the price of an index overall.

Also, traders trade CFDs on spot indices since it’s a more balanced way to trade the world’s top financial market. The reason is that you do no need to waste time and analyse how an individual company’s stock performs.

Keep in mind that there are numerous indices tracking various groups of shares. For example, the FTSE 100 in the UK tracks the performance of the 100 companies listed on the London Stock Exchange. Some other indices target a broader spectrum, such as a whole region, while others only focus on a specific sector.

How to get into indices trading 

How to calculate indices

The stock of a company is more broadly classified as large cap, mid cap or small cap. Indices are calculated by market capitalisation or price-weight. The former uses the market value of a company’s outstanding shares in total to evaluate the extend of its impact on the index. As a result, large caps, that is, the more valuable companies, will have a bigger impact on the total value of the index compared to mid or small cap. S&P 500, FTSE 100 and NASDAQ are examples of indices with market capitalisation.

The other way is price-weighted indices which use the share price of a company to examine to what extend it can move an index. Put simply, those companies that have higher share prices will more greatly influence these indices. If we put the share price of every stock together and then divide by the number of stocks in the index in total, we will have calculated the value of a price-weighted index. Dow Jones and Nikkei 225 are two examples of price-weighted indices.

Which factors influence indices movement?

Benefits of trading indices

First of all, the requirement for an initial margin is low and  leverage can be high. Also, trading CFDs on indices means that traders can take advantage of upward or downward movements in the prices of indexes based on their position. By speculating on the price of multiple stocks instead of buying individual stocks traders get more exposure to the market and get to diversify their trading portfolio.

Also, they get to hedge against any offcut to the exchange rate in their current portfolio. Last but not least, since the exposure is wider and the picture of the market’s performance is larger compared to trading individual stocks, there is also the opportunity to diversify trader risk.

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