A quick guide to trading indices
Stock trading is an incredibly popular and well-known pastime amongst investors, which is why the global stock market boasts roughly $29 trillion in total market capitalization.
Interestingly, there are many ways to invest in the stock market in the digital age, with CFD trading offering access to stocks and indices without requiring you to assume ownership of underlying financial instruments.
In this respect, CFDs are particularly popular amongst those who trade stock market indices, which certainly offers greater flexibility when looking to profit from shares and equity. Here’s our brief guide to trading indices in 2021.
What is Index Trading?
Index trading is unlike investing in a commodity, currency or even an individual stock, as it enables you to access a number of similar or associated assets within a single (and relatively broad) option.
Stock indices are often categorized by their market or country of origin, with an individual index therefore capable of providing an indicator of a particular industry or a country’s economic performance.
When you participate in index trading, you’ll effectively be investing in a very large segment of a particular market or economic region, creating an immediately diversified portfolio that minimizes risk and exposure in an uncertain marketplace.
For example, if you trade the FTSE 100, you’ll be investing in an exchange that features the 100 companies listed on the London Stock Exchange and tends to offer a broad market representation. When you invest in the Dow Jones Industrial Average, you can also directly target a significant portion of the industrial market.
By trading these indices through a CFD, you can also speculate on individual price movements (both positive and negative) and execute orders without having to assume ownership of a specific stock.
The Why and the How – Index Trading in 2021
There are numerous reasons why you may want to trade indices rather than individual shares, aside from their ability to naturally diversify your interests.
For example, less technical analysis is required to invest successfully in indices, as investors can spend more time on analyzing a single chart and dataset rather than attempting to screen thousands of individual stocks for the right investment option.
Indices also offer higher levels of liquidity, which in turn contributes to together spends and less money being spent on each individual transaction.
If you trade through vehicles such as index futures, you can also access more leverage and benefit from a more profitable portfolio over time. Futures contracts of this type enable traders to buy or sell a particular index in real-time, with the transaction to be settled at a predetermined future date.
This vehicle is used to speculate on the direction of price movement for the target index within a defined period of time, such as the FTSE 100 or the S&P 500.
Another popular way of trading indices is through exchange-traded funds (ETFs), which involves the collection of shares and works by tracking the target index. This is an option that certainly affords investors flexibility, as they can simultaneously trade across numerous industry sectors in order to achieve a profit.