Indices measure the price performance of a basket of securities or a group of shares. Indices trading provides investors with the opportunity to gain exposure to an entire sector at once while opening only a single position. Instead of buying and selling individual company shares, you trade an index or a basket of shares.
With CFDs, you can speculate on the price of indices by going long or short on rising or falling prices without owning the underlying asset. Indices are highly liquid assets, and with more trading hours you have greater exposure to potential opportunities.
Why trade indices?
Stock market indices are traded in large volumes and are very popular. They are suitable for beginners who are starting their trading journey, but are also suitable for experienced traders.
Here are some of the benefits of trading the major indices:
- Go long or short. You can trade CFDs by speculating on the price of the index going up (go long) or down (go short).
- Trade with leverage. CFDs are leveraged products. This means you can use a small position to gain greater market exposure to the financial asset.
- Hedge your existing positions. Indices trading is an effective way to diversify your portfolio as you are investing in a wide range of stocks or other assets and the risk is spread out. You can trade indices to hedge against certain risks which may be connected to a particular company or industry. For example, if you have a current short position on several individual stocks which feature on an index, you can hedge against the risk of any price increases by going long on that index. If the price of the index rises, you will earn a profit, offsetting a proportion of the losses on any short stock positions. However, if the price of the index decreases, you will make a loss.
- High volatility=greater opportunities. Indices provide high volatility. They represent the health of the economy they track and changes in the economy can cause the volatility of indexes to increase which leads to trading opportunities.
The major stock indices
The most traded stock indices worldwide include the S&P 500, Dow Jones Industrial Average, Nasdaq Composite, DAX 40 and FTSE 100.
- S&P 500. The S&P 500 (or Standard & Poor’s 500) index is an American stock market index based on the market capitalisation of the largest 500 companies listed on the New York Stock Exchange (NYSE). It is one of the most traded indices and is considered to be one of the best indicators of the performance of the US stock market and US economy. The S&P 500 index represents around 80% of the total value of US stock markets.
- The Dow Jones Industrial Average. The Dow Jones Industrial Average is one of the oldest, most well-known and most frequently used indexes in the world. It is a price-weighted measurement stock market index of 30 prominent companies listed on stock exchanges in the US. The Dow Jones represents about 25% of the value of the entire US stock market, but a percent change in the Dow should not be interpreted as a definite indication that the whole market has fallen by the same percent. A change in the Dow represents changes in investors’ expectations of the earnings and risks of the large companies included in the index.
- The Nasdaq Composite Index. The Nasdaq Composite is a stock market index that includes almost all stocks listed on the Nasdaq stock exchange. Along with the Dow Jones and S&P 500, the Nasdaq Composite is one of the three most -followed stock market indices in the US. Although Nasdaq Composite has a tech-heavy focus, it also includes securities from other sectors.
- DAX (Germany 40). The DAX is a stock market index consisting of the 40 largest German companies trading on the Frankfurt Stock Exchange.
- FTSE 100. The Financial Times Stock Exchange 100 index, or the FTSE 100, measures the performance of 100 blue-chip companies listed on the London Stock Exchange.
How to trade indices?
The most popular way to trade indices is via CFDs (Contracts for Difference). You can also trade cash indices or index futures and index ETFs.
- CFDs. By trading CFDs on indices, you can gain easy access to major indices and speculate on indices that are rising in value as well as falling.
- Cash indices. Cash indices provide tighter spreads than index futures so are preferred by day traders who have a short-term outlook. You can close your cash indices positions at the end of the trading day and open new positions the following morning to avoid paying overnight funding charges.
- Index futures. Index futures are contracts to buy or sell an index at a set price today and settled at a date in the future. They are often preferred by traders with a long-term market outlook. If you plan on holding on to an index position for a long time, trading index futures will mean that you don’t incur overnight funding charges.
- ETFs and shares. Another way to trade indices is through Exchange-Traded Funds (ETFs) which also track the movement in indices for calculating a composite value of stocks in the fund which is used to make investments in the market.
Trade major indices on the MetaTrader 4 platform
MetaTrader 4 is the smart choice for online traders. It’s suitable for both beginners and advanced traders as it has a very simple and user-friendly interface, allowing you to apply different strategies and speculate on the charts to find trading opportunities.
