Think of indices as baskets containing groups of shares. These shares are traded on a centralized exchange such as the NYSE (New York Stock Exchange), NASDAQ, or LSE (London Stock Exchange), among others. Indices traders have carte blanche to choose from many different options across America, Europe, Asia, and Australia at Xtrade. Indices trading is the same as indexes trading – the words are synonymous, but indices is the preferred nomenclature. Indices are powerful performance measures of groups of stocks, and of the economy as a whole. The constituent components of an index are weighted according to their importance in a particular index. To gain a better understanding of indices trading, it's worth examining the factors that impact stock prices in an index.
While every index is inextricably linked to the performance of its core components, knowledge of indices trading is fully transferable across indices all over the world. An understanding of how the FTSE 100 Index (a broad measure of the performance of the UKs 100 biggest companies by market capitalization) trades will serve you well when trading regional and national stock market indices around the world.
Many people are already familiar with national stock market indices such as: Canada (S&P/TSX Composite Index), South Korea (KOSPI Index), Brazil (BOVESPA Index), France (CAC 40 Index), India (BSE SENSEX Index), Italy (FTSE MIB Index), UK (FTSE 100 Index), Japan (Nikkei 225 Index), Germany (DAX Performance Index), and China (SSE Composite Index).
The Biggest Stock Exchanges & Indices in the World
It comes as no surprise that US stock exchanges dwarf their competition by a long margin. The top 10 stock exchanges by market capitalization in 2021 include the following:
- New York Stock Exchange
- NASDAQ Composite Index
- Hong Kong Exchanges
- Shanghai Stock Exchange
- Shenzhen Stock Exchange
- LSE Group
- TMX Group
- National Stock Exchange of India
Naturally, the indices of these countries will feature stocks with the highest market capitalization, and generate the largest amount of trading interest. It's important to draw a distinction between a stock exchange and a stock index. A stock exchange is a centralized location where stocks are traded. A stock index is a gauge to assess the performance of the market.
Xtrade covers all the biggest indices trading markets for traders. These include the following country-specific indices:
USA Indices at Xtrade
- Russell 2000 Index
- NASDAQ Composite Index
- USA 30 Index
- US Dollar Index
- USA 500 Index
- US-Tech 100 Index
USA Indices at Xtrade
- Italy 40 Index
- Germany 30 Index
- Spain 35 Index
- UK 100 Index
- Russia 50 Index
Asia Indices at Xtrade
- Hong Kong 50 Index
Australia Indices at Xtrade
- Australia 200 Index
How to Trade Indices Online?
Now that you know exactly an index is, it's time learn how to trade indices online. Recall that online trading is about buying and selling based on your speculative assessment of the future direction of the index. If you're feeling bullish about the UK 100 index, you buy the index (go long). If you're feeling bearish about the UK 100 index, you sell the index (go short). All indices such as the Russell 2000, NASDAQ, USA 30, US Dollar Index, USA 500 index, US-Tech 100 Index have a buy price and a sell price. Go long or short based on your assessment of the markets.
Would you believe that there are approximately 5,000+ US indices currently being traded? The US equity market is bubbling over with indices for every imaginable group of stocks. The most heavily capitalized indices are also the most heavily traded. These benchmarks of macroeconomic performance are powerful financial instruments to include in your portfolio. As integral components of the equities markets, indices provide behind-the-scenes insights into the health of the economy.
Recall that the pricing of indices is determined by a capitalization -weighted averages of the core components of the index. What exactly does that mean? Take the NASDAQ as a case in point. This represents 2500+ shares listed on the NASDAQ Stock Exchange. These are market capitalization-weighted components. The constituent categories making up the NASDAQ include the following:
- 48.39% weighting for technology shares
- 19.43% weighting for consumer services
- 10.21% weighting for healthcare
- 7.21% weighting for financials
- 6.85% weighting for industrials
- 5.51% weighting for consumer goods
- 0.81% weighting for utilities
- 0.72% weighting for telecom
- 0.55% weighting for oil and gas
- 0.32% weighting for basis materials
Constituent Components of the NASDAQ 100 Index
Therefore, if you're looking to trade the NASDAQ composite index, your focus should be on technology shares, consumer services, and health care. The other components, although significant, are much less important in determining price movements for the NASDAQ composite index. Focus on the components of the index that are more likely to impact pricing. With the NASDAQ, its technology stocks and consumer services, and to a lesser degree healthcare.
The NASDAQ 100 is the index which is comprised of the most innovative companies on the NASDAQ. Focus on the weighting of the top performing companies in the NASDAQ 100 in order to assess bullish or bearish price patterns. Take a look at the following chart for detailed information into the cap-weighted components of the NASDAQ 100 index:
- Apple Inc – AAPL – 10.938 weight
- Microsoft Corporation – MSFT – 9.728 weight
- Amazon.com Inc – AMZN – 8.686 weight
- Alphabet Incorporated – GOOG – 4.093 weight
- Facebook Inc – FB – 4.002 weight
- Tesla Incorporated – TSLA – 3.621 weight
- Alphabet Inc – GOOGL – 3.62 weight
- Nvidia Corporation –NVDA – 3.481 weight
- PayPal Holdings Inc – PYPL – 2.45 weight
- Adobe Incorporated – ADBE – 1.986 weight
These are the top 10 components of the NASDAQ 100 index. As you can tell the top 10 account for 52.6% of this particular index. Your strategy should focus on the most heavily-weighted stocks in the index. When Apple, Microsoft, and Amazon are booming, chances are the NASDAQ 100 index is moving in the same direction, and vice versa.
Reasons to Trade CFD indices
Contracts for Difference (CFDs) are derivatives instruments. Their value is derived from the underlying financial instruments that they are tracking. A CFD is a contract which mirrors the price of the index/indices you are trading. CFD trading allows you to go long if you're feeling bullish on the index, or to go short if you're feeling bearish on the index. Your profit or loss is calculated by the actual performance versus your prediction.
An example will help to clarify:
- Suppose you are trading the NASDAQ 100 index and you go long. If the price rises by the time you sell the CFD, the size of the price appreciation determines your profits.
- Suppose you are trading the NASDAQ 100 index and you go short. If the price falls beneath the price at inception, the size of the price drop will determine your profit when you buy the CFD.
If you get it wrong, and prices move in the opposite direction, the degree to which the price moved will represent your losses. In a traditional trade, without a CFD in play, prices have to appreciate in order for profits to be generated. With CFDs, you can profit in rising or falling markets. By the same token, it is possible for CFDs to result in losses. Be cautious when trading financial instruments with derivatives.
Trade CFD Indices with Leverage
One of the biggest bugbears for traders is capital availability. There simply isn't enough capital to invest in every financial instrument you interested in, without running out of money. CFDs present you with an alternative. With leverage, you're not using all of your capital to trade indices. The margin requirement is small, thereby allowing you to diversify your portfolio into different financial instruments such as CFD stocks, CFD Forex, CFD commodities, and CFD indices at Xtrade.
We offer 20:1 leverage on indices trading. That means for every $1, you get $20 worth of trading power on your chosen indices. This allows you to diversify into multiple financial instruments, avoiding concentration in indices, or any other financial instrument. You've always heard about the dangers of putting all your eggs into one basket – now you can actually understand what it means with leveraged trading.
Risk Mitigation Strategy
Perhaps you have substantial investments in technology stocks listed on the NASDAQ. You may want to guard against losses by hedging through CFD indices. Recall that hedging strategies AK risk mitigation strategies – are investments that protect against losses in other assets. If you are trying to protect your traditional investments in AAPL, GOOG, FB, and AMZN, you may want to consider shorting CFD indices.
While trading indices at Xtrade, you will encounter many useful tools along the way. These include stop orders and limit orders, designed to automatically close positions if market conditions turn against you, or closing positions if you get your preferred market price. By correctly predicting the price movement of an index, you can certainly profit from CFD indices trading. To do so, you must conduct the required technical and fundamental analysis using charts, graphs, and macroeconomic variables. A caveat is in order: CFDs are inherently risky, so losses can certainly result. Trade cautiously at all times.
Practice trading CFD indices on a demo account before you deposit and trade CFDs for real money using leverage. There are many different factors that can impact indices prices. These include geopolitical events such as political unrest, wars, embargoes, tariffs, elections, environmental disasters, macroeconomic variables, financial reports, and the like. Overall, indices are certainly much lower risk than individual stocks which are considered highly volatile.
The index itself can never going to liquidation, even if one of its core components fails. That's because the failure of one component automatically introduces a new component to the index. Conversely, the failure of an individual share that you have invested in will result in losses for you. Not so with the index.
There are two ways that indices prices are calculated. One is a price -weighted index, where companies with high share prices have a higher weighting on the index the other is a market value-weighted index where the sum total of shares multiplied by price determines the importance of the company in the index.
Apply Your Trading Knowledge
Now, you can use the full power of Xtrade’s indices trading platforms to your advantage. Learn to apply your newfound knowledge of how macroeconomic variables impact indices pricing. Xtrade WebTrader is a dynamo; this browser-based trading platform ensures an optimal indices trading experience. We've also got mobile trading apps for Android, iOS and Tablet trading on the go.
Broaden your horizons and diversify portfolio with indices trading at Xtrade.