FUTURES AND CASH INDICES TRADING

Indices are useful because they help investors gauge the general state of a country’s economy. Investors in the US, for example, may look to indices like the S&P 500 to gain an understanding of how the US economy is performing. Likewise, UK investors may look to the FTSE 100 and German investors may look to the DAX 30.

You can’t invest in indices directly, but you can go short or long on an index through a CFD product.

To short an index means to sell the product in the anticipation that the price will fall.

To go long on an index means to buy the product in the anticipation that the price will rise.

The great benefit of shorting or longing CFD indices is that you can trade on the price movements in either direction.

If you’re also a more risk-averse trader, then index trading can be a good option for you. Stock index CFDs usually experience smaller price fluctuations compared to individual shares, for example. This is because indices are more diversified, which leaves you less exposed to individual company risks.

A price movement in an index results from the price movements of the companies within it.

Various factors can cause price movements, including economic data, geopolitical events, and market sentiment. Usually, when investors are bullish, there will be more buyers than sellers, leading to an increase in stock prices. However, when investors are bearish, it usually results in more sellers than buyers, which will lead to stock prices falling.

Simply put, if more stocks within an index are declining in price, the value of an index will drop. Conversely, if more stocks are rising in price, it will cause an index to jump in value.

There is no one set way to calculate the value of an index. However, most indices either use a price-weighted or value-weighted formula. To understand how they differ, let’s look at them both more closely.

1. Price-weighted index

To calculate the index trading price, each company is weighted according to its share price. As price is the determining factor, the larger priced stocks have more of an impact on how an index performs than lower priced stocks.

The most notable index which follows a price-weight formula is the Dow Jones Industrial Average (DJIA), an index that comprises the 30 largest companies in the US. The value is calculated by taking the average price of all 30 securities and dividing the figure by a divisor.

To further understand how weighting is determined, let’s look at an example:

If Apple’s stock went from $135 to $145, because it commands a higher price valuation, it would move the Dow Jones index more than, say, Intel’s stock going from $60 to $70, as higher prices are more significant than percentage movements.

2. Value-weighted index

Many of the significant indices like the S&P 500, NASDAQ and Russell 2000 are value-weighted. In this type of index, each company's weighting is based on its market capitalization.

The following formula is used to calculate the weighting:

The stock price x the number of shares outstanding / market capitalization of all shares

Here is a brief example of how value-weighting works:

If Apple has 17.5 billion shares outstanding and trades at $135, then its weight in the value-weighted index is $2.36 trillion. But if Tesla is trading at $730, and has only 960 million shares outstanding, its weight is $700 billion. Although Tesla trades at a higher price, Apple has a stronger weight in an index due to the company having a larger market capitalization.

Create an account and log in

If you don’t have an account with us, you can create an account here. After you successfully create an account, go ahead and log in.

Select the index you want to trade

We have 15 different indices to trade from, including popular options such as the S&P 500, DOW Jones, FTSE 100, and the DAX 30.

Decide whether to go long or short

After you’ve selected an index you wish to trade, you’ll need to decide whether you want to open a long or short position.

Set your stops and limits

To mitigate the potential risk of losses, always ensure you have stop and limit orders in place before executing a position.

Open and monitor your trade

After you open your trade, it’s important to monitor your positions frequently to evaluate the performance.