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Trade has been one of humanity's greatest livelihoods for thousands of years. This trade sometimes included basic consumables and sometimes durable everyday use materials. However, one of the most important trade products of today has been stocks and their indicator indices.

 

Indices are an indicator of the price performance of a group of stocks in an exchange. For example, when it comes to FTSE 100, this is the performance indicator of the top 100 companies on the London Stock Exchange. Trading indices allow you to be exposed to an entire economy or industry at the same time.

 

CFDs allow you to speculate about the price of rising or falling indices without taking ownership of the underlying asset. Indices show a very liquid market feature with long trading hours, and this gives investors an advantage over other markets.

 

How are stock market indices calculated?

Stock indices are generally calculated according to the market value of component companies, and therefore, the weight of large companies affects the upward or downward movements of the index more.

On the other hand, some popular indices are price-weighted. Dow Jones Industrial Average (DJIA) is one of these indices. In this method, more weight is given to companies with higher share prices rather than market value. This means that price changes in these securities will have a greater impact on the current price of the index.

 

What are the most traded indices?

  1. DJIA (Wall Street) – measures the value of the 30 largest blue-chip stocks in the US
  2. DAX (Germany 30) – tracks the performance of the 30 largest companies listed on the Frankfurt Stock Exchange
  3. NASDAQ 100 (US Tech 100) – reports the market value of the 100 largest non-financial companies in the US
  4. FTSE 100 – measures the performance of 100 blue-chip companies listed on the London Stock Exchange
  5. S&P 500 (US 500) – tracks the value of 500 large cap companies in the US

 

How to identify what moves an index’s price

 

Factors affecting the price of an index can be listed as follows:

 

Economic news : Central bank announcements, investor sentiment, payroll reports are the leading news affecting the price movements of an index.

 

Company financial results : Another factor affecting the price movements of an index can be shown as individual company profits and losses.

 

Company announcements : Changes in the leadership of the company or possible mergers may affect both the stock prices and the price of the index.

 

Changes to an index’s composition : Addition or exclusion of companies may have an impact on index prices.

 

Commodity prices : Some indices such as the FTSE 100 include commodities in addition to stocks. For this reason, fluctuations in commodity prices may also affect the index price.

 

  • Why trade indices?
  1. Long or short trading
  2. Using leverage
  3. Hedging the positions
  4. Long or short trading

There is two way while trading index with CFDs. These are long and short positions. Having long positions means the buying market with the expectation of rising of price and vice versa for having short positions. Your profit or loss is determined by the accuracy of your prediction while trading with CFDs.

 

  1. Using leverage

CFDs are leveraged products which means you only need to commit a small initial deposit to open a position that gives you much larger market exposure. But there is an important point need to highlighted is that trading with leverage is risky which means your profit or loss is calculated for entire position size.

 

  1. Hedging the positions

Investors must be prepared for every scenario in stock markets. Hedging existing positions is one of the precautions to take for risks and cover the loses. While shorting the stock market with the big proportion of money having some long positions or vice versa will be useful for hedging.

 

How to trade indices

  1. Best way to trade indices
  2. Trading cash indices or index futures
  3. Create an account and log in
  4. Select the index you want to trade
  5. Decide whether to go long or short
  6. Set your stops and limits
  7. Open and monitor your position
  8. Best way to trade indices

 

CFDs which is the financial derivatives can be used to trade indices. CFDs are generally used to speculate on indices that are rising in value, as well as falling. CFDs are a contract between two parties to exchange and take the advantage of price difference the point of contract opened and closed.

 

  1. Tradeing cash indices or index futures

When you trade with Finage, there are two ways to take advantage of an index price: with cash indices or index futures.

 

Cash indices

Cash indices are preferred by short-term traders like day traders because they have tighter spreads than index futures. Another feature of these cash indices is traded on the spot price obtained by taking the front month futures price and applying the fair value.

Many traders who trade on cash indices try to avoid paying overnight funding fees. For this reason, they close their cash index positions at the end of the trading day and open new positions the next morning.

 

Index futures

Index futures, which are generally preferred by traders with a long-term market target, have wider spreads than cash indices, but differ in the inclusion of an overnight funding fee. Index futures are traded at the price that futures traders agree to deliver in the future. Another advantage is that traders will not pay overnight funding fees if they plan to stay in an index position for an extended period of time.

 

ETFs and shares

Finage allows trading in cash indices and index futures, as well as index ETFs and individual stocks.

 

  1. Create an account and log in to Finage

By opening an account with Finage, you can start trading indices on CFDs today. Using our experienced technical team and advanced trading tools, you can trade CFDs on various exchanges around the world.

 

  1. Select the index you want to trade

It is very important to determine which index fits your trading strategy. Your choice of index depends on your risk tolerance, capital and choice of long or short term position. To give an example from the world stock markets, Germany 30 is a floating index that often contains high risk tolerant traders. But the US 500 is preferred by traders with stable returns and low risk tolerance. Finage has index markets in many different indices around the world and it is very easy to choose the market that suits your trading style.

 

  1. Long or short choice

Going long in an index means speculating about the index value, going short means you think its value will decrease.

If the status of a sector is better than the index performance of the companies, long positions can make you profit if the index increases. But if the outlook is weak, you can go short and wait for the index value to decrease.

 

  1. Adjust your stops and limits

During index trading, you should use the stop and limit tools to manage and minimize risks. In this way, if your position falls below the current market value, your position will be closed automatically thanks to the stop order. In the limit order, it automatically closes your position leading to a more favorable market price.

 

  1. Open and watch your trade

When you decide to trade indices, first go to the market you want on a trading platform where you decide to trade. eg: Wall Street. Then decide whether you want to trade cash or futures. If you think the price will increase, choose the buy option, if you think the price will decrease, choose the sell option. After determining your position size, click on "deal" to continue your transaction. Then constantly check your position and close your trade at the best time for you.