One of the top performing and most widely known global indices is the Dow Jones. The Dow Jones Industrial Average tracks the overall performance of the 30 largest companies in the US. If the average price of the 30 companies goes up, the Dow Jones goes up as well. If the price goes
down, the Dow Jones will fall too.

Read on to find out all about indices trading, index CFDs, why you should trade indices and how to get started.

Types of stock indices

There are different types of stock indices. The main types include the following:

Country-focused indices

Country-focused indices represent the stock markets of specific countries. For example, the S&P 500 tracks the performance of the 500 largest companies listed on US exchanges.

Exchange-based indices

Exchange-based indices are designed to track stocks listed on a particular stock exchange. The NASDAQ 100 index tracks non-financial stocks listed on the NASDAQ exchange.

Regional stock indices

Regional stock indices represent specific geographic regions. An example is the FTSE Developed Asia Pacific Index which tracks the performance of stocks listed in developed countries within Asia.

Sector-based indices

Sector-based indices track specific sectors of the stock market such as healthcare stocks or financial stocks.

How are indices calculated?

Indices are usually market-weighted or price-weighted.

The S&P 500 Index is a market-weighted index which means that every stock in the index is represented in proportion to its total market capitalisation. Basically, if the total market value of all 500 companies in the S&P 500 falls by 10%, the value of the index also falls by 10%.

With price-weighted indices, companies with higher share prices, like the Dow Jones Industrial Average, have a bigger impact on the index.

Benefits of trading indices

Index trading is a popular way to gain exposure to financial markets without having to invest in individual company stocks, commodities or other assets directly.

Lower margin requirement

The initial margin requirement for indices trading is low and leverage can be high. Also, with CFDs on indices, you can take advantage of upward or downward movements in the price of an index.

Diversificatie

When you speculate on the price of multiple stocks, you gain greater exposure to the market. Basically, you are diversifying your trading portfolio as you are not placing all your eggs in one basket. The US_Tech100 index, based on the NASDAQ 100 will allow you to diversify across the world’s most successful tech companies. So, when you invest across a wide array of companies through one single asset, if one or more companies fail, the index can still rise.

Indices have more consistent trends than currencies
The market movements of indices depend on the price movements of the underlying stocks within the index. Stocks within the same sector tend to trend in the same general direction. Therefore, during bullish times, indices will usually react accordingly and follow the same trend making them more predictable.

What drives index prices?

If the prices of the stocks in the index rise, the index will rise, but if the prices fall, the index will fall. Share prices can be influenced by many different factors shown below:

• Currency movements
• Political instability
• Geopolitical events
• Interest rates
• Economic news
• Company announcements
• Investor sentiment

How to trade indices

The most popular way to trade indices is by trading CFDs (Contracts for Difference) on spot indices. CFDs allow you to profit both from falling or rising prices. You can open a short (sell) position if you think the index price will fall. If you think the index price will rise, you can open a long (buy) position.

Basically, online indices trading on CFDs involves speculating on the rising or falling price of indices rather than owning the actual asset.

Choose your indices trading platform

Trading platforms provide a convenient way to trade indices. You can trade indices via the leading MetaTrader 4 trading platform or WebTrader. The best broker will offer the best indices trading platforms, and a reliable platform will offer you quick access to technical and fundamental analysis, an excellent security system, automated trading, as well as features like graphs and charts.

Explore indices trading opportunities with IronFX

Ready to start trading indices? Check out IronFX and explore indices trading opportunities with a reliable, global broker. Follow the steps below to start trading today:

• Understand what index trading is and how it works
• Open a demo or live account
• Choose the index you want to trade
• Select your trading platform
• Open a position, monitor, and close your first trade.

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.

The post Why Trade Indices appeared first on Complete Turnkey Introducing Brokers (IB) Solution at IronFX.

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.

The post How to Start Online Indices Trading: Complete Guide appeared first on Complete Turnkey Introducing Brokers (IB) Solution at IronFX.