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A Guide How to Trade Indices

An index (plural, indices) is a measure of a collection of assets or tradable securities. It aggregates the prices of all the underlying assets and provides a single value representing them. In this way, indices act as an “average reading” of particular market segments or asset classes, and thus function as a handy benchmark of the grouping they represent. Today, there are many indices in use, and some of the most prominent ones are stock market indices that describe the state of different markets.  

One example is the S&P 500, which tracks the collective performance of the 500 largest companies listed on the U.S. stock exchanges. Another is the Dow Jones Industrial Average – probably one of the longest-running stock indices out there – that tracks 30 of the most successful companies listed in the U.S. 

Different countries and/or geographical regions have their own stock market indices too. For instance, the FTSE 100 is a listing of the biggest 100 companies listed in London, while the Nikkei 225 tracks the top 225 companies listed in Tokyo, while in Singapore, the Straits Times Index tracks the 30 largest and most liquid companies listed on the Singapore Stock Exchange.

How are indices calculated? 

The method used to calculate an index depends on the type of assets being tracked, as well as the goal of the index. Two of the most common methods of calculation are price-weighted and market capitalisation-weighted. Some indices may also choose to use an unweighted calculation. 

Why trade indices?

There are several compelling reasons to trade indices, such as: 

At Vantage, you can trade indices using indices Contract for Differences (CFDs), where you trade the rise and fall of indices prices, without having to actually own the index. With CFDs you can also trade with leverage, allowing you to execute larger trades even with limited capital.  

The pros and cons of trading indices CFDs 

Pros  Cons 
Lesser volatility than individual assets or securities  Lower upside potential, as individual price movements of constituent stocks are averaged out 
Greater diversification within each index, making it potentially less risky than building own portfolio  No control over underlying assets or how they are weighted 
Potential profitability in bull and bear markets  Lack of downside protection, as losses are not capped unless there is a stop-loss in place 
Traders are able to trade using leverage, allowing execution of larger trades with limited capital. However, leverage involves inherent risks of amplifying potential losses.    

How to trade indices? 

An index is simply a measurement and doesn’t actually hold any of the underlying assets. Thus, index trading is performed via different financial instruments, such as Exchange Traded Funds (ETFs) or index funds. You can buy and sell shares of ETFs or index ETFs that track the index you want to trade. You can also trade indices via CFDs. A CFD is a contract between an investor and a brokerage to exchange the difference in the price of an index between the time the contract opens and closes. CFD Indices trading requires a degree of knowledge and skill, which is better suited for seasoned traders. 

Example of index trading using CFDs 

The following example illustrates how index trading using CFDs works. Let’s set up a hypothetical CFD trade with Index ABC, which currently has a bid/ask price of 5000/5002. We’re following a long strategy in this scenario, but note that CFDs also allow you to take a short position if you’re bearish about the index. To begin the trade, you decide to open a long position, as follows: 

Scenario 1: Index ABC moves up

Index ABC makes a 30-point move to the upside, giving you a winning trade. You decide to close your position and take the profit. Each one-point move equates to USD 1 per contract. Hence, the 30-point move in Index ABC gives you a profit of USD 1 x 2 x 30 = USD 60. A profit of USD 60 over an initial investment of USD 500.20 = 11.99% ROI for the trade.  

Scenario 2: Index ABC goes down

Let’s assume this time that the trade goes against you; Index ABC enters a downtrend, and you decide to close your position to cut your losses. At closing, the index has fallen by 25 points. Once more, since 1 point equals to USD 1, your total loss on the trade is USD 1 x 2 x 25 = USD 50.  

Tips for trading indices via CFDs 


Index trading offers many advantages. Investors can gain exposure to several different companies or securities at once, grouped based on predefined criteria like large-cap companies. This eliminates the need to individually monitor stocks or securities, while benefiting from greater diversification. 

Trading indices using CFDs provides investors with a more flexible and powerful tool to seize market opportunities regardless of market direction. With its margin facilities, advanced investors can take larger positions with smaller upfront capital. However, it’s crucial to exercise prudent leverage management to mitigate the risk of margin closeouts. 


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