All you need to know about indices trading in 2021

Indices Trading

Table of Contents

What are indices? 

Indices are a means of measuring the price performance of a collective share group on an exchange. Indices trading lets you get exposure to a large sector, category, or the entire economy at once with an opening in just a single position. How great is that! One can speculate on the falling and the rising value of indices by trading the asset through CFDs. Indices are highly liquid and offer more trading hours than other markets. 

What is Indices Trading?

Indices trading refers to trading and speculating on indices’ price movements and attempting to make a profit. Various indices are available to measure stocks’ performance or other assets of different sectors and categories or Commodities. Traders who pursue indices trading either focus on a single index or trade multiple indices as a part of a more comprehensive strategy. 

How the indices of the stock market are measured

Most of the time, the stock market indices are calculated based on the companies’ market cap that holds those stocks. When this methodology of measurement is followed, higher weightage is given to large-cap companies. This means large-cap companies’ performance will influence an index’s value more than the small or low cap companies. 

However, there are some indices like DJIA – Dow Jones Industrial Average, which are measured on the prices. With this method of measurement, higher weightage is given to companies that have higher prices of shares. The fluctuation of highly-priced shares’ value will affect the index more than the price changes in low valued shares. 

Some most popular and traded indices

  1. DAX – This index chases and tracks the performance of the 30 major companies that are listed on the FSE – Frankfurt Stock Exchange. 
  2. NASDAQ 100 – Tracks the value of 100 major non-financial companies in the US. 
  3. DIJA – Measures the performance of 30 major blue-chip stocks in the US. 
  4. S & P 500 – Measures the performance of 500 large capitalisation companies in the US. 
  5. FTSE 100 – Tracks the performance of 100 companies (blue-chip) that are listed on the LSE – London Stock Exchange. 

Factors that move the price of an index

Any of the following factors can influence the price of an index: 

  • The companies’ profit and losses will influence the prices of the stock, which then affects the price of the index. 
  • The economic news and announcements by major financial institutions and banks can affect the market’s volatility and influence the price of the index. 
  • The announcements related to the company, like change in leadership positions, or mergers will affect share and index prices. 
  • The change in the prices of various commodities will affect the prices of different indices. Many indices have commodity stock listed within them. 

Any fluctuations in the value of such commodities will affect the prices of the index. 

  • The change in the composition of the index can also lead to changes in its price or value. When companies are subtracted or added, the change in the value of the index is obvious. 

Reasons to trade indices

1. Trade with leverage

Indices are traded via CFDs, and CFDs are leveraged products. With leverage, you need to invest a small amount, known as margin, to trade large positions to give you a wide-angle and exposure towards the market. 

But at the same time, trading with high leverages can invite higher risks. Your profit, as well as the loss, is calculated on the entire position, including the leveraged amount, and not only on your initial deposit. 

2. Go short and long with indices trading 

While pursuing indices trading via CFDs, one can go short as well as long with the positions. While going long, you buy in the market as you expect that the prices will rise. Going short means selling in a market because you expect that the price will decline. With CFD trading, the profit and loss of positions are determined by how precisely you depict the market’s rise and fall and the market change’s overall size. 

3. Hedging 

Any investor or trader who has a group of shares might short the index to safeguard the portfolio’s losses. If the market declines and the shares fall in value, the index’s short position will increase the value and protect the investor from potential losses. But if the stock rises in value, then the short position on the index will offset a part of profits. 

Steps on how to pursue Indices Trading 

  • Choosing how you want to trade indices:- There are several ways to trade indices. One of the best ways is to pursue indices trading through CFDs. With CFDs, no physical exchange of assets takes place. Rather, the trader speculates on the price changes of the underlying asset.
  • Cash indices or index futures:-  Cash indices are for traders who want to pursue short term indices trading. Indices tend to have firmer spreads than index futures and are traded at the spot price. Most traders who trade cash indices close their position as the trading day ends and open new trading positions the next day to avoid overnight charges. Index futures are for traders who want to go long term with their indices trading. Even though they have wider spreads as compared to cash indices, the overnight charges are absent. Index futures are traded at a price set in the future and agreed on in the present.
  • Creating an account with a broker:-To trade any asset, you need to have an account with an authorised and regulated broker and financial service provider. If you are eyeing a regulated online broker to facilitate indices trading in various markets, we recommend ETFinance. ETFinance is a regulated online broker functioning in Italy, Norway, Denmark, Sweden, and Spain. The broker deals in various instruments like indices, CFDs, forex, commodities, metals, stocks, indices, ETFs, Cryptocurrencies, and more.
  • Selecting the index you want to trade:- There is a wide range of indexes available with indices trading. You need to select the index that goes best with your trading style as well as financial goals. This will also depend on whether you want to take long or short positions in your trade.
  • Setting stop losses and limits:- It is very crucial that you use one or the other stop and limit order on your trade. A stop-loss will close the position on its own when the loss goes beyond the trader’s limit. On the other hand, a limit order will automatically close the position when the position moves towards a more positive price.
  • Opening and monitoring the trade:- When you think you are all set for indices trading, it is time to open your trading position. To do so, you need to go to the market you want to trade on the trading platform.

Then, you have to choose between the cash or future price and then place the deal. 

Conclusion 

Indices trading is a great way to diversify the portfolio and getting massive exposure by opening just one position. You can profit significantly from indices trading if you can accurately predict the changes in an index’s price movements. The profit and loss are measured by the extent to which your prediction was correct.

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