Indices Trading for New Traders

An index is a ‘group of shares’ that is traded on a centralised exchange. Think of the major exchanges that you know such as the NASDAQ, the London Stock Exchange, or the New York Stock Exchange. There are centralised exchanges all over the world. Indices trading or indexes trading refer to the same thing. These widely traded performance measures assess a group of stocks, or the economy overall.

Consider several popular indices:

• FTSE 100 Index – measures the top 100 companies in the UK by market capitalisation.
• NASDAQ Composite Index – measures 2500+ listed equities on the NASDAQ stock exchange.
• Germany 30 index - measures the performance of the 30 largest publicly-traded companies on the Frankfurt Stock Exchange.
• Spain 35 index - measures the performance of the 35 most traded stocks on the Spanish Continuous Exchange.
• France 40 index - measures the performance of the 40 biggest and most actively-traded stocks on the Cotation Assistée en Continu (CAC) in France.
• Hong Kong 50 index - measures the performance of the top Hong Kong-listed shares on the Hang Seng index.
• Australia 200 index - measures the performance of the top 200 ASX-listed companies by market capitalisation.

Now that you’ve got an idea of what an index is about, let's turn our attention to CFD indices trading at Xtrade.net*

What is CFD Index Trading?

A CFD is an acronym for Contract for Difference. It is a derivative financial instrument whose price is derived from the underlying asset being traded. In this case, it is the buying and selling of indices. An Xtrade.net, you can buy and sell CFD indices in markets across America, Europe, Asia, and Australia. Click here to access a full list of CFD indices at Xtrade.net. Usually, when you trade regular indices, prices must appreciate before you can enjoy any profits. With indices CFD trading, it is possible to trade indices in rising or falling markets. You can also learn about shares.

To trade an index CFD, first determine which way you believe prices are likely to move. If you are optimistic about the future price movement of the index, you buy the CFD. This means that you have an expectation of a price increase. If you are pessimistic about the future price movement of the index, you sell the CFD. This means that you have an expectation of a price decrease. Let's backtrack for a moment to explain how a CFD actually works. This contract between a trader and a broker states that the buyer must pay the seller the difference between the current value of the asset and the value of the asset when it is due.

How do CFD Indices Work?

CFD indices are traded with leverage. This means that only a small percentage of the total trade amount is required up front to open a trade. Suppose you're interested in trading the NASDAQ composite index which is offered with the leverage of 30:1 at Xtrade.net. That means you get 30X your buying power with every position you open.

If the NASDAQ composite index is being traded at a price of $14,500, or currency equivalent, you only have to front 1/30 of that amount from your own capital. This is known as your margin requirement. It is easily calculated. If leverage is 30:1, margin is 1/30. It is always the reciprocal. In this case, the margin requirement is 3.33%, which means you would have to put down $483.33 to open a CFD trade of that value.

Benefits of Trading CFD Indices

• Smaller capital outlay required upfront
• Near-zero inflation-related costs with CFD index trading
• CFD indices trading is a powerful hedging tool against downward price movements in traditional indices
• Portfolio diversification is possible, since there is less asset concentration of your capital
• Indices CFDs are generally preferred by traders, since if one component of the index fails, it doesn't spell disaster for the entire index.
• With indices CFD trading, the index will never have a value of zero. Since these baskets of shares measure the top performing listed companies by market capitalisation, if one company fails, the next one in line takes its place.

Risks of CFD Indices Trading*

While there are certainly many benefits associated with CFD indices trading, it is not without risk. CFD trading by its very nature is laden with risks. These short-term financial instruments, known as derivatives, can fluctuate wildly in price. Despite our best efforts to gauge the performance of the financial markets, uncertainty remains.

With CFD indices trading, you are actually liable for the full value of the trade (if markets turn against you) even if you only front the margin amount. CFD trading overall is risky since you stand to lose much more than your deposit if the trade sours.

Now you can confidently put your trading knowledge to the test with indices CFD trading at Xtrade.net in demo mode, before you trade for real.

* Risk Disclaimer : CFD trading is inherently risky, and not suitable for all types of traders

** Caveat: It is important to understand that traders are liable for the full value of the trade, not simply the margin requirement.

List of Indices