How to Start Online Indices Trading: Complete Guide

Indices track the overall performance of a group of stocks. In other words, the stock market performance is depicted through movement of indices. It is rather a representation of an average movement of securities, as grouped by the indices. These indices are built as per market capitalisation, size of companies or any other classification deemed right by the respective organisation. Index or market index is a listing of a segment or group of stocks on an exchange, which measures their collective performance based on a statistical calculation of financial data related to the underlying stocks.

Taking the FTSE 100 as an example, it tracks the 100 major companies on the London Stock Exchange. Trading indices gives you the opportunity to get access to a market at once although you have opened just one position.

Traders speculate on the price of indices which rise or fall without owning the underlying asset. They do this on the best indices trading platform, like the MT4. The Indices’ market has high liquidity as there are more trading hours compared to other markets. As a result, the exposure to opportunities and risk is longer.

Why trade indices?

Indices are a representative portfolio for tracking the value of investments in the market. The representation criteria could be anything ranging from geography or growth status in economy. They are used as benchmarks in the market to compare various segments. They provide a basis for creating and maintaining index funds, making it easier to invest in a specific segment of the market without having to own individual underlying stocks. They also help in hedging against the risk of unexpected price movements from inter and intra sectors in a diversified portfolio when the positions held in the investor’s portfolio are against the market trend.

Indices trading gives different perspectives on a specific segment depending on the metrics chosen. Market indices have changed how trading used to work before their inception. These composite indices make tracking movement in the market highly effective. They are like a smartwatch for exchanges. They are the prompts that trigger investors to make a move and also help in understanding the current mood of a stock exchange.

How to trade Indices? Instruments used for Trading Indices

Indices can be traded through different markets and financial instruments based on the investor’s financial goals:

Spot Market, also known as physical market or cash market – These markets display and track the spot values of assets listed on the indices in focus, aka market price. The underlying instrument on indices in the spot market can be traded on spot values for real-time delivery or settlement. Here, delivery means the agreement to settle the transaction by immediately paying for the underlying instrument in full. The underlying asset could be a stock or commodity.

Derivative Market – This market tracks the prices of derivative instruments listed on the index, which can be speculated for their volatility. These markets typically work on future settlement as against immediate delivery. There are multiple derivative instruments for trading indices such as futures, options and CFDs. The philosophy behind derivative market is to replicate the returns of the benchmark index it tracks.

Indices make the movements and trends in the market self-explanatory, as they follow a defined basis and do not have ambiguous behaviour as long as the underlying basis is clear. There are index funds that have been introduced by institutional fund managers in the market to make it easier for investors to speculate on the movement of indices, as investors cannot trade directly on certain indices.

One way to trade indices is through Contract for Difference (CFDs) which is a popular tool for speculating on price differences on an index for a segment of the market, without having to own the underlying stocks. Turning to volatility in specific sectors based on political triggers, natural environment etc, the entry and closing prices could be managed to make a profit.

Another way is through Exchange-Traded Funds (ETFs) which also track the movement in indices for calculating a composite value of stocks in the fund which is used to make investments in the market.

Which indices to trade?

Dow Jones Industrial Average and S&P 500 are some of the best indices to trade today. The former is one of the oldest and most popular stock market indexes worldwide and tracks the price of 30 of the top U.S companies traded publicly. The latter includes 500 of the largest companies in the U.S market and represents more or less 80% of the market capitalisation in the U.S in total.

Generally, indices are divided into 4 categories:

1. Large U.S. stocks like S&P 500, Dow Jones Industrial Average or Nasdaq Composite



2. Small U.S. stocks like Russell 2000, S&P SmallCap 600



3. International stocks including MSCI EAFE, MSCI Emerging Markets



4. Bonds such as Bloomberg Barclays Global Aggregate Bond

These are also some of the best indices to trade for beginners. The latter can start trading indices by:

1. Choosing the index they wish to monitor.



2. Pick a fund that tracks your index.



3. Purchase shares of the specific index fund.

Investing in indices

The financial markets are highly sensitive to market supply and demand and need to be traded with caution. There should always be a hedging mechanism in place and all the capital invested should not be put in one basket to secure the bulk of the investment. Investing in physical commodities such as gold and real estate keeps a portfolio balanced and cushions market investors from such unforeseen risk.

Trading on the MT4 has made the experience seamless and has given numerous options for investors to choose from and form their unique trading style. Trading indices has explicitly been made quite intuitive through the user-friendly interface of the platform.

DISCLAIMER:

This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.