A beginner’s guide to trading in Indices

Financial traders the world over spend years researching and seeking out the best advice so that they can make healthy profits in the markets. It can be a risky business where losses can cause great distress, so it’s important gather knowledge and learn from experience while calling upon advice wherever necessary.

Stock Market

There are many ways to trade the markets, whether in commodities, companies and businesses or in the foreign exchange market, with some astute traders enjoying the rewards that Indices CFDs can bring.

What are Indices?

They provide a measurement of a price performance of a group of shares in the exchange market. The most traded indices include the likes of the NASDAQ 100 which tracks the market value of the largest companies that are non-financial in the USA. FTSE 100 report on 100 leading companies that are listed on the London Stock Exchange, while another famous name often reported on financial reports on daily news bulletins is DJIA, or Dow Jones, of Wall Street in New York who evaluates the biggest 30 blue-chip concerns in the USA. 

How does trading in Indices work?

Basically, traders can speculate on a whole Indices rather than the individual companies in it through CFDs or spread betting. 

How are Indices calculated?

The market capitalisation of their component companies calculates Indices. The larger companies inside it and their performance will affect the value of the index more than its smaller members. Dow Jones is an exception as it is price-weighed so that companies with higher share prices within the index have a greater bearing on the price of it.

What to watch out for when trading in Indices?

The prices can be affected by many factors which include economic events which can cause volatility, while the annual financial results of a company in the index can have a dramatic effect. Announcements such as redundancies or takeovers can cause huge ripples, as can changes in the composition of the index as new companies replace others, with the price of various commodities also playing their part.

What are the benefits?

As in the foreign exchange market, it allows traders to go long or short and speculate on what will be going down as well as up. For instance, if a trader believes an index is about to hit hard times, they can still make money from spread betting and CFDs. 

Other markets can be volatile with high liquidity, so being able to have immediate exposure to a whole index offers great benefits. It allows for a simplistic and immediate way to trade on the movement of an entire market rather than having to trade in individual companies. Because it is possible to trade with leverage a small deposit is all that is required to still gain large profits, while it is also possible to hedge existing positions.

In conclusion

Trading on Indices offers great benefits in a volatile market as rather than risking on a single company a whole group determines prices offering a less risky way to make money.