Indices

Indices Market

Indices are a measurement of the performance of a group of shares from an exchange. Indices represent the top shares of a certain market and are created by combining the different values of these shares to create one aggregate average. For example, the FTSE 100 tracks the 100 largest companies on the London Stock Exchange. Other major financial indices include the Dow Jones Industrial Average, the S&P500, the Nasdaq, the CAC 40, and the Dax 30.

As indices provide a measure of the price behaviour of a particular sector, they are used as a tool to gauge the health of a market. In this sense, trading indices enables you to get exposure to an entire economy or sector at once, by only having to open a single position.

Benchmark indices

A benchmark index is a standard used to evaluate the state of the market or its segments. Most often stock indices play the role of benchmarks. In the US stock market for example, the S&P 500 and Dow Jones Industrial Average are two of the most popular large-cap stock benchmarks.

Comparing the dynamics of the movement of benchmarks of different markets allows you to identify the dynamic of different across sectors and decide on how to speculate on major indices with CFDs.

What moves indices?

An index’s value changes as the prices of its constituent shares fluctuate, so it will mirror any general upward or downward trend in the group of stocks it tracks. The largest contributors to the index – in other words, the most powerful company names included in the index – should always be monitored as they tend to move the index the most.

Major economic data releases of an exchange index (including inflation, unemployment, inventory levels and treasury yields) should also be closely monitored. You can keep an eye out for these key releases on Inefex Economic Calendar.

Other major geopolitical events also have an impact on indices – these can include trade wars, newly imposed tariffs, strict regulations or bans on certain products and of course head-on disputes and acts of war.

Trading example

As with all CFDs, when trading on the price of an index you can go long (buy) or short (sell).  Let us suppose that you wish to place a trade on the price of Germany’s DAX.  Your research suggests that the DAX is about to edge higher, so you decide to buy 1 contract of DAX which is currently trading at 12976 (sell price) / 12980 (buy price)

Given that you can use 1:20 leverage, you only need to use $649 of your free margin to place your trade. Since you only bought one contract, you overall gain or loss will be equal to the price change in the DAX value. If you had bought 10 contracts, then your gains or losses would be 10 times bigger and so on.

Note that your P&L is always calculated in the currency of the index you are trading, but once the trade is closed, the resulting profit or loss will automatically convert to the currency of your trading account.

Benefits

CFDs allow you to trade on indices without purchasing the actual index at face value. Instead, you are trading with leverage, which enables you to gain a much larger market exposure. It is important to remember that leverage can increase potential gains but also increases a trader’s exposure to potential losses. In comparison to traditional markets, CFDs enable you to gain instant access to trade indices during the times when their respective market is open.

Risks

While the risk of trading indices tends to be lower than the risk of investing in individual stocks (as indices are less volatile), CFDs are leveraged products, which means that gains or losses are automatically magnified. It is therefore important to choose an index that is best suited to your trading style.