Index Trading: A Beginner’s Guide

Index Trading: A Beginner’s Guide, FP Markets

References to the closing prices of major stock indexes across evening news is common, with experts often providing a brief summary of the day’s events.

Over the past week, for example, market sentiment has been dictated by incremental news flow surrounding the worldwide spread of coronavirus. Global stock indices plunged in response to this.

What’s a Stock Index and Why Are They Important?
Think of stock indexes as benchmarks, a gauge to measure the general health, or performance, of the overall stock market in a country.

A stock index is a range of stocks, collected in what’s known as a basket, to track a market or sector. The Dow Jones Industrial Average tracks the value of 30 publicly-owned companies listed on the NASDAQ and the New York Stock Exchange (NYSE), for example.

Stock market indexes range in size. Some have a handful of stocks that govern price movement; others take thousands of stocks into consideration.


Major Stock Indexes

  • The Dow Jones Industrial Average often referred to as ‘the Dow’, is a price-weighted US index, weighted in proportion to their price per share.
  • The S&P 500, also known as Standard & Poor’s 500, is a stock market index weighted by market capitalisation (or market cap), tracking 500 large-cap US stocks (including the 30 stocks that compose the Dow Jones Industrial Average). Market capitalisation is calculated by multiplying the total number of a company’s outstanding shares by the current market price. Like the Dow, it represents the stock market’s performance.
  • The FTSE 100, or ‘Footsie’, is an index of 100 blue-chip stocks listed on the London Stock Exchange, with the highest market capitalisation.
  • The DAX 30 is a blue-chip stock market index containing 30 German stocks listed on the Frankfurt Stock Exchange and is weighted by market cap.
  • Japan’s Nikkei 225 is a price-weighted index, comprised of 225 blue-chip stocks listed on the Tokyo Stock Exchange.


What Affects Stock Indexes?

  • The companies, particularly those with the largest weighting, that make up an index.
  • Major political events.
  • Tier-1 Macroeconomic data.
  • Interest rates. Lower interest rates boost stock market appeal – generally more attractive than holding bonds.
  • Market expectations.

Advantages of Trading Indices

  • Indexes offer a way to gain exposure to certain markets or sectors.
  • Trading indices allows you to speculate on the direction of movement of an underlying index, without actually having physical ownership of any shares, like Apple, for example.
  • Availability of leverage. You can choose to increase your exposure with a small investment.
  • Low transaction costs.
  • Risk management – diversification from any one stock’s volatility while maintaining exposure to the wider stock market.
  • Clear market trends, favoring a number of trading styles within the field of technical analysis – great for day trading (day traders on short-term timeframes), swing trading, and trend-trading strategies.

How Can I trade Indices?
Stock indexes cannot be traded directly. Trading products are, however, available via CFDs (contracts for difference), ETFs (exchange-traded funds), index futures, or options. For the purpose of this segment, though, the focus will remain with CFDs – those unfamiliar with CFDs, check out An Introduction to How Contract for Differences (CFD) Trading Works 

Index Trading: A Beginner’s Guide, FP Markets

The FTSE 100, as an example, is a widely traded index. Like any stock index, the FTSE cannot be traded like individual stocks. Rather, you can trade the FTSE 100 index using contracts for difference (CFD), the UK100. Trading the FTSE using CFDs allows long or short positions.

CFDs work in lots. This is the size of a CFD trade and is dependent on the instrument traded, which is found in the contract specification tab on MT4/5 platforms. For example, the minimum contract size for a EUR/USD trade in foreign exchange is 0.01 (1,000 units of the base currency), while for indices, with FP Markets, the minimum lot size for is 1 lot.

  • Start trading Index CFDs with FP Markets Today, an Award-Winning Online Broker
  • FP Markets provides exposure to major global stock indices through index CFDs, at competitive leverage on world-class trading platforms.
  • Since no ownership of the underlying asset takes place, trading costs are lower and, thanks to our competitive leverage offering up to 1:100 (China50: 1:50), you can choose to increase your exposure with low investment.
  • Accessible and affordable low-cost competitive margins, starting at 1%.
  • With an exposure of $1 per point movement, cash index contracts allow you to accurately measure the size of your position based on your risk profile.
  • No commission. The cost of cash index contracts is included in the bid/ask spread.
  • Hedging risk. Diversification of your portfolio by trading CFDs on indices and hedging your risks.
  • Choose from our wide range of online trading platforms, including MetaTrader 4and 5WebTrader, and IRESS.
  • Should you need guidance on trading, look no further than our dedicated Trader’s Hub.
  • FP Markets places a strong emphasis on safety, regulated by the top-tier Australian Securities and Investments Commission (ASIC).

 

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