Beginner’s Guide to Trading Indices
Assets are mostly used for trading in financial markets. Aside from this, there are other tradable elements such as ETFs, indices, etc. Indices are the most popular in trading stocks.
Individual assets that are grouped together are called indexes. Index makes it easy for the traders to see the general price movements of the assets since it always measures prices and offers an average price point. In an instance in a stock market, indices merge the shares of individual companies such as Google, Microsoft, Apple, etc.
S&P 500, Dow Jones, NASDAQ are the examples of the most popular indices on the market. Because of their importance, these indices are often called “benchmark indices. Politicians and economists usually use them to know the health of the whole country’s economy since these indices combine the shares of the most powerful companies.
Hence, indices can be utilized to have an idea about the status of the financial markets as well as forecast at some level the price directions of specific assets. Aside from this, traders can also use indices for actual trading.
CFDs together with individual assets are famous among traders. Indices can be used as CFDs. With this, traders can wonder the future index value without buying it. They can also generate profits or losses depending on how successful the trade will be.
Types of Index Trading
Stock indices are the famous index types because they merge some largest companies in the world. Because of that, traders, economists, and other people see them helpful for having a better view of the economic situation in the country. If the companies listed on the index become successful and growing, the index value will increase too. In contrast, the index will decrease if the companies are unsuccessful and there is an economic crisis. These conclusions may not be accurate but still useful in general.
There are other types of indices such as Forex indices, bond indices, etc. USDX (also known as (DXY or DX) is the most popular Forex index. It is a measurement of the US dollar (USD) against other international currencies which are Japanese Yen (JPY), Euro (EUR), Swedish krona (SEK), Swiss franc (CHF) and Canadian sterling (CAD).
Indices in Actual Trading
Traders can use indices in 2 methods, as a market indicator or as trading CFDs.
· Indices as market indicators
Since indices merge a lot of individual assets, the index price becomes the major indicator of how the industry is functioning.
For an example, if the index price is increasing, it means that the individual asset prices are also increasing, and the industry status is good. The trader can use this information for trading individual assets and can conclude that since the index value is increasing, it might be worth buying a certain asset because its price might increase more.
However, if the price starts to decrease, a trader can speculate that even though his asset is still good and increasing, it might start to decrease as well because other assets are going that way.
These conclusions are all speculations and might not work as it is. There will be a time that these predictions might become reality and sometimes they will not. It is important to take note of this when using indices as price indicators.
· Indices as trading CFDs
Portfolio diversification in which traders prefer to reduce risks. Indices are merged individual assets which are considered as diversified portfolios. However, CFDs do not require the traders to own assets. That is the main difference of CFDs (contract for difference) from diversified portfolios.
For example, a trader can open a long position (buy) on the FTSE 100 index without buying any asset. This means that the trader speculates that the index value together with its assets will increase in the future.
If the index value increases, the trader will get a payout from this CFD trade. The amount of payout will be based on the difference of the initial price (the price when the trader buys) and the final price (the price when the trader sells). However, if the FTSE 100 value decreases, the trader will have to pay the price difference.
Traders choose indices for trading because it offers much larger exposure to the market. This means that the index traders can open positions on the market without conducting detailed research. The reason is that the direction of the index prices can be a good indicator of the status of the industry. Also, indices are less volatile. The individual assets cannot have a big effect on their value.