Indices trading describes the buying and selling of a specific stock market index. An index shows the performance of a group of stocks. When the price of a group of stocks go up, the value of the index increases. If the price falls, the value of the index will drop. One of the top performing and most widely known global indices is the Dow Jones. The Dow Jones Industrial Average tracks the overall performance of the 30 largest companies in the US. If the average price of the 30 companies goes up, the Dow Jones goes up as well. If the price goes down, the Dow Jones will fall too.
Read on to find out all about indices trading, index CFDs, why you should trade indices and how to get started.
Types of stock indices
There are different types of stock indices. The main types include the following:
- Country-focused indices. Country-focused indices represent the stock markets of specific countries. For example, the S&P 500 tracks the performance of the 500 largest companies listed on US exchanges.
- Exchange-based indices. Exchange-based indices are designed to track stocks listed on a particular stock exchange. The NASDAQ 100 index tracks non-financial stocks listed on the NASDAQ exchange.
- Regional stock indices. Regional stock indices represent specific geographic regions. An example is the FTSE Developed Asia Pacific Index which tracks the performance of stocks listed in developed countries within Asia.
- Sector-based indices. Sector-based indices track specific sectors of the stock market such as healthcare stocks or financial stocks.
How are indices calculated?
Indices are usually market-weighted or price-weighted. The S&P 500 Index is a market-weighted index which means that every stock in the index is represented in proportion to its total market capitalisation. Basically, if the total market value of all 500 companies in the S&P 500 falls by 10%, the value of the index also falls by 10%.
With price-weighted indices, companies with higher share prices, like the Dow Jones Industrial Average, have a bigger impact on the index.
Benefits of trading indices
Index trading is a popular way to gain exposure to financial markets without having to invest in individual company stocks, commodities or other assets directly.
- Lower margin requirement. The initial margin requirement for indices trading is low and leverage can be high. Also, with CFDs on indices, you can take advantage of upward or downward movements in the price of an index.
- Diversification. When you speculate on the price of multiple stocks, you gain greater exposure to the market. Basically, you are diversifying your trading portfolio as you are not placing all your eggs in one basket. The US_Tech100 index, based on the NASDAQ 100 will allow you to diversify across the world’s most successful tech companies. So, when you invest across a wide array of companies through one single asset, if one or more companies fail, the index can still rise.
- Indices have more consistent trends than currencies. The market movements of indices depend on the price movements of the underlying stocks within the index. Stocks within the same sector tend to trend in the same general direction. Therefore, during bullish times, indices will usually react accordingly and follow the same trend making them more predictable.
What drives index prices?
If the prices of the stocks in the index rise, the index will rise, but if the prices fall, the index will fall. Share prices can be influenced by many different factors shown below:
- Currency movements
- Political instability
- Geopolitical events
- Interest rates
- Economic news
- Company announcements
- Investor sentiment
How to trade indices
The most popular way to trade indices is by trading CFDs (Contracts for Difference) on spot indices. CFDs allow you to profit both from falling or rising prices. You can open a short (sell) position if you think the index price will fall. If you think the index price will rise, you can open a long (buy) position.
Basically, online indices trading on CFDs involves speculating on the rising or falling price of indices rather than owning the actual asset.
Choose your indices trading platform
Trading platforms provide a convenient way to trade indices. You can trade indices via the leading MetaTrader 4 trading platform or WebTrader. The best broker will offer the best indices trading platforms, and a reliable platform will offer you quick access to technical and fundamental analysis, an excellent security system, automated trading, as well as features like graphs and charts.
Explore indices trading opportunities with IronFX
Ready to start trading indices? Check out IronFX and explore indices trading opportunities with a reliable, global broker. Follow the steps below to start trading today:
- Understand what index trading is and how it works
- Open a demo or live account
- Choose the index you want to trade
- Select your trading platform
- Open a position, monitor, and close your first trade.