What are indices?
Indices serve as a gauge for the price development of a collection of shares from a market. The FTSE 100, for instance, keeps tabs on the 100 largest corporations listed on the London Stock Exchange (LSE). You can gain exposure to a whole economy or industry at once by trading indices, and you only need to open one trade.
Spread betting and CFDs allow you to make predictions about index price movements without actually owning the underlying asset. Since there are more trading hours for indices than for most other markets, you can get a longer exposure to prospective chances. Indices are a highly liquid market to trade.
How are stock market indices calculated?
Most stock market indices are calculated according to the market capitalisation of their component companies. Larger cap firms are given more weight in this strategy, which indicates that their performance will have a higher impact on an index's value than smaller cap companies.
The Dow Jones Industrial Average (DJIA), among other well-known indices, is price-weighted. According to this methodology, companies with higher share prices are given more weight, which means that changes in their values will have a bigger impact on the index's current price.
What are the most traded indices?
- Dow Jones (Wall Street) - measures the value of the 30 largest blue-chip stocks in the US.
- NASDAQ (US Tech 100) - reports the market value of the 100 largest non-financial companies in the US.
- S&P 500 (US 500) - tracks the value of 500 large-cap companies in the US.
- FTSE 100 - measures the performance of 100 blue-chip companies listed on the London Stock Exchange
- DAX (Germany 40) - tracks the performance of the 30 largest companies listed on the Frankfurt Stock Exchange
What moves an index’s price?
Economic news - The underlying volatility of an index can be influenced by investor sentiment, central bank statements, payroll statistics, or other economic developments, which can cause an index's price to change.
Company financial results - Share prices can change due to individual company profits and losses, which can impact the price of an index.
Company announcements - Share prices can also be impacted by potential mergers or changes in management, which could boost or depress the value of an index.
Changes to an index’s composition - When companies are added or removed from weighted indices, their prices may change as traders modify their positions to reflect the changing composition.
Commodity prices - The prices of various indices can be impacted by various commodities. For instance, 15% of the shares listed on the FTSE 100 are commodity stocks, therefore changes in the price of the index may be impacted by changes in the commodity market.
Why trade indices?
- Obtain immediate access to a whole index
- Go either long or short
- Leveraged trading
- Hedge your current positions
Obtain immediate access to a whole index
The vast amount of market exposure obtained in a single position is a key benefit of trading indices with derivatives like spread bets and CFDs.
Indices evaluate the total performance of all the stocks included in the index, which serves as a representation of the entire market or industry. Consider a noteworthy occurrence that impacts the market as a whole as opposed to just a few particular companies. You can speculate on how an event will affect a large cross-section of the most significant stocks in an economy or sector by taking a stake in an index like the S&P 500.
This method of trading an index also allows you to take your position at the current market price, minus any transaction fees.
You would have to spend the time and money to buy the individual index shares, or you could invest in an exchange-traded fund (ETF), which would be priced in accordance with the fund's net asset value, to achieve a comparable degree of exposure through traditional investing.
In a nutshell, trading on the movements of the entire market at the present price is done immediately and directly using indices.
Go either long or short
You can trade indexes long or short using spread bets and CFDs. Going long entails purchasing a market with the expectation that the price will increase. Going short entails selling a market because you anticipate a decline in its price.
This means that you can take a position to profit if the price of an index declines.
Your profit or loss in spread betting and CFD trading depends on how well you predicted the market's movement and how much it moved overall.
Leveraged trading
Leveraged products include spread bets and CFDs.This means that to create a position that gives you significantly greater market exposure, you only need to make an initial deposit (also known as margin).
When utilising leverage, keep in mind that the total position size, not simply the initial margin utilised to open it, is considered to determine your profit or loss. As a result, while leverage might increase profits, it can also increase losses.
Always ask yourself if you comprehend how leveraged instruments operate and if you can afford to incur the significant risk of losing your money before engaging in any trading.
Hedge your current positions
An investor with a diverse portfolio of shares may choose to short an index to hedge against portfolio losses. Their shares will depreciate if the market has a downturn, but the value of the short position on the index will rise, offsetting the stock losses. The short index position would, however, offset a portion of the gains if the stock prices rose.
You may use a long position in that index to protect against the danger of any price increases if you currently have short positions in numerous individual equities that are included in the index. A percentage of the losses on your short stock holdings will be offset by the profits on your index position if the index increases.
