Index trading enables one to gain exposure to an economy or an entire sector through a single trade. You can anticipate the prices of falling or rising indices using CFDs without having to take ownership of the asset. Stock index CFDs are sold, bought, and analyzed in the same way as traditional stocks. You must know some facts to trade indices online and leverage the increased exposure to potential opportunities. Here are some insights:
What is index trading?
Index trading is the purchasing and selling of specific stock market indices where investors can determine their purchase decisions by speculating on the rise or fall of index prices. An index is the representation of the performance of a definite group of stocks. Hence, one does not purchase an actual underlying stock but the average performance of such a group of stocks. The value of an index increase when the share prices for firms within an index group rises. With the price drop, the index value also falls.
If you trade indices online, you must be aware of index futures CFDs and index cash CFDs. The difference between the future and the cash market is that there is no expiry date for the cash. The futures market has an expiry date which is also called ‘rollover.’ A futures contract is an agreement between a seller and the buyer on the price that needs to be paid by a buyer on a future date.
How are stock market indices calculated?
Calculation of stock market indices has been simplified in the digital era with the aid of different methods like price weighing formula and market capitalization. The price weighing formula gives weighting to firms with higher share prices. It means that the current price of an index will be largely affected by the change in its values.
Market capitalization determines the worth of a company’s stock in terms of total dollar market value. It gives greater weighting to larger-cap companies, which indicates that the performance of such companies will impact the value of an index more than the lower-cap companies.
What factors determine the movement of index market prices?
When you trade indices online, you must thoroughly understand various external forces that affect index market prices. The factors responsible for the movement of index market prices are as follows:
Global News: The index price generally decreases in times of economic uncertainty. Natural calamities or disasters would negatively impact the index market by affecting a country’s economy.
Commodities: Some stocks in an index are commodity stocks, and fluctuations in the market can potentially impact index prices.
Economic news: The underlying volatility of an economy is impacted by various economic events like trade agreements, NFPs, employment indicators, payroll reports, bank announcements, and investor sentiment may cause the index price to move.
Index reshuffle: Price shift is visible in weighted indices when companies are removed from or added to the stock index.
Company announcements: Important company decisions like possible mergers, the release of financial results, or changes in the company’s leadership affect share prices. It may have a positive or negative impact on the price of an index.
You can trade indices and gain both long- and short-term benefits for your company, hedge existing positions, or gain market exposure through trading with leverage. So, before determining the trading strategy, it is important to analyze your trading routine that would yield maximum results.
