How To Trade Indices
Welcome to Trading Brokers step by step guide to trading indices online. Here you will find an easy to understand explanation of indices trading. This includes how to trade indices online, what you need to trade indices and how to open a trading account with a broker so that you can start trading indices online today.
Maybe you have heard of indices trading online or through a friend. Perhaps you are looking to trade and are curious about the different options available to you. Whether you are looking to speculate, invest or just learn more, this guide on how to trade indices can help you along your journey.
What are indices?
Stock indexes are a popular trading vehicle. An index is simply a collection of stocks (or other assets) that moves according to the stocks held within it. A stock index is a measurement of a section of the stock market.
The values of the grouped stocks are used to calculate the value of the index (typically a weighted average). Any change in the price of the stocks leads to a change in the index value.
Indices allow investors to gain an insight into the performance of an asset class or a segment of that asset class. Indices are used as the underlying for various financial instruments and to benchmark the performance of portfolios designed to replicate the performance of a given asset class.
Indices traders speculate on price movements in stock Indices like the FTSE 100, the Dow Jones and DAX. Some of the most widely followed indexes include:
- The FTSE 100: Sometimes called the ‘UK 100,’ this represents the UK’s hundred biggest companies by market capital
- Dow Jones: Often referred to as simply ‘Wall Street’ this index is the price weighted average of 30 of the most significant stocks that are traded on the NASDAQ and New York Stock Exchange (NYSE)
- S&P 500: The value of the Standard & Poor 500 is based on the share prices of 500 leading US-based companies
- The DAX: Referred to as the ‘Germany 30,’ this index is made up of 30 major German companies
- NASDAQ 100: The ‘US Tech 100,’ is a capitalization-weighted index made up of over 100 tech companies in the US
- Nikkei 225: Japan’s biggest price-weighted index is comprised of 225 of the country’s biggest companies
- CAC 40: Simply referred to as the France 40 this comprises 40 of France’s biggest companies by capitalization
- Euro Stoxx 50: This index collects together 50 of the largest European companies’ share value
How does indices trading work?
The most popular way to trade indices is via CFDs (contracts for differences). These financial instruments allow traders to profit from both rising and falling prices without actually owning the underlying asset or stock index in this case.
Traders would open long (buy) positions, if they think an index will rise or short (sell) positions if they thought that the index will fall. The difference in price between the entry and exit price is the traders realised profit or loss, excluding any broker commission and fees.
For example, a trader can place a buy order on the DAX 30. If the price of the index goes up, when the trader comes to sell, they will earn the difference between the buy and sell price. If the price of the index goes down, the trader pays the difference and makes a loss.
Where to trade indices?
ASIC, BVI, CBI, FFAJ, FSA, FSCA
Min $100 Deposit
FCA, CFTC, NFA, BaFin, FINMA, ASIC, FMA, MAS, FSA, FSCA, DFSA, JFSA, METI, MAFF
Min $250 Deposit
ASIC, FCA, DFSA, SCB, CySEC, BaFin
Min $200 Deposit
ASIC, CySEC, IFSC
Min $5 Deposit
What moves indices prices?
Indices price movements and volatility are impacted by factors like political events, major factors which affect companies in a particular sector, economic data such as employment figures and big changes in the foreign exchange (currency) markets.
It is worth bearing in mind that major shifts in the fortune of a single big company which is part of a wider index can disproportionately impact on the overall performance of an index. One leading index is the S&P 500, which reflects the collective value of the top 500 companies listed on US stock exchanges. If the overall value of those companies’ shares rises, the price of the S&P 500 will go up.
Global Indices markets are dominated by what are commonly referred to as “benchmark Indices”. These are the stock indices which have an outsize impact on economies and are generally held as overall indicators of the economic health of a particular country or area.
Why trade indices?
Trading indices is a balanced way to trade on the world’s top financial markets without having to analyse the performance of an individual company stock as they offer exposure to an entire industry. Investors do not have to perform thorough research on individual company reports; they only need to take a bullish or bearish position on a stock index, depending on the overall market sentiment.
Trading global indices with an online broker enables traders to go both long and short on price movements in major indices from around the globe including the UK, US, Asia, Australasia and Europe.
Indices traders can benefit from market movement across not just a single sector, but a wide variety of different types of companies, providing ample trading opportunities along with the potential to diversify their portfolio and potentially reduce the overall risk of exposure to extreme volatility.
The price movement of indices can also be smoother as no one individual stock is likely to induce an extreme price spike, although of course anything can happen in trading. This naturally makes index trading less volatile.
That being said, due to the amount of activity that takes place on individual stocks, indices can still offer sufficient volatility for active traders to find trading opportunities according to their own individual trading strategies. This can be especially true for day traders and news-based price action followers since indices often reflect the broad economic effects of both political and economic shifts.
For the longer-term investors, index trading can be an easy way to diversify their portfolio. Instead of investing in just a few stocks and multiplying risk, index-based exchange traded funds (ETFs) can offer exposure to the entire stock market, whilst simultaneously reducing the risk of a single company negatively impacting an entire trading portfolio.
Most brokers will offer leveraged indices trading which can magnify the size of your trades without committing large amounts of capital upfront. For example, leverage of up to 1:20 allows you to start trading indices with as little as $100 whilst being able to manage $2,000 of capital ($100 x 20 = $2,000).
Whilst this can increase potential profit, leveraged trading also greatly increases risk. It is imperative that you have a full understanding of what leverage is and the significant risks involved with trading leveraged positions.
How to trade indices online?
If you have taken the time to read through the above, you should hopefully have an understanding of how to trade indices. Here is a summary of the key steps:
1. Decide if indices trading is for you
Trading indices online carries an element of risk and can take more time than other forms of investing. You will need to research indices, manage your indices positions, follow market news and decide how to react to it. It is important to understand the risks and dedication that comes with trading indices online.
2. Educate yourself
Before trading indices, it is imperative to learn as much as possible about investing and stock indices. Any mistake could prove to be costly. There is an abundance of free educational materials provided by many online indices brokers that can help you to improve your trading skills and knowledge.
Most indices brokerages will also provide a free demo trading account so that you can practice trading indices online with virtual funds in order to familiarise yourself with the trading platforms and practice your trading strategies until you feel confident enough to open a real trading account.
3. Choose a indices broker
In order to trade indices online, you will need a broker account and trading platform to execute your trade positions. When choosing a broker, there are a few important things to consider such as regulation, commission fees, platforms, tools, education, funding options and customer support.
If you do not have the time to research brokers, you can see a list of our best brokers that we have already prepared to help traders. If you would like to know more, you can also view our detailed guide on how to choose a trading broker.
4. Research indices
If you have made it this far then you may be ready to start trading indices online! The next step is to research the different companies to discover which indices you have an interest in trading. Perhaps there is a particular industry, product or service that is already of interest to you. Many brokers will allow you to filter indices according to various criteria in order to narrow down your search if need be.
Many traders will begin by analysing different companies, studying public information such as finances, earnings and reports from professional analysts. The best brokers should have this information conveniently displayed for you within their trading platform.
5. Have a indices trading plan
Some of the most important factors that can help determine your results when trading indices can be the trading plan and discipline. It is important to have a solid trading plan personalised to your own needs that includes the money management and trading strategy that you will use. Most experts and professional traders would try to not let negative emotions such as fear, anger and greed affect their trading strategy.
6. Buy and sell indices
Once you know what indices you want to trade online, you can analyse them to help decide if and when you will place your trades. After placing a indices trade, you will need to keep track of how it performs and manage it according to your indices trading plan. Some investors will keep hold of indices for the long-term, whereas traders may buy and sell stocks on a daily basis.
Is indices trading right for me?
Indices trading is a popular choice for active investors who would like to trade some of the biggest companies grouped together rather than individual stocks. The variety of indices means that there is ample opportunity to look for trades in different categories.
Indices trading can be suitable for scalping, day trading and swing trading. Traders who would usually trade forex, trade stocks, trade commodities, trade cryptocurrency, may look to diversify their portfolio.
However, it is important to understand the significant risks involved with trading indices online, especially when using leveraged positions. Most experts would suggest trading on a demo account with virtual funds to begin with.
This can be a useful way to familiarise yourself with how to trade indices and using trading platforms whilst allowing you to practice your trading strategies until you feel confident and produce consistent results. Most trading brokers provide unlimited demo accounts free of charge.
Not sure which indices broker to trade online with?
If you are still unsure which indices broker is the best for you to trade online with then you can use our free online broker comparison tool to quickly compare indices brokers based on regulations, minimum deposit, leverage, spreads, commissions, funding options and more. You can also read our broker reviews and choose from our best stock brokers, best trading platforms, best social trading platforms and best trading apps. If you would like to look for the best trading brokers in a particular country, we have pages dedicated to our best brokers USA, best brokers UK, best brokers Australia, best brokers South Africa and best brokers Canada.
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