Indices: What are they and how to trade them?
Stock market indices are a representation of the overall performance of a group of stocks within a specific market or sector. They provide a snapshot of how these stocks are collectively performing. Traders can use various financial instruments like index futures or exchange-traded funds (ETFs) to trade these indices.
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INDICES
An index is a group or basket of securities, derivatives or other financial instruments that represents and measures the performance of a:
- Specific Market (such as the UK Market, Chinese Market, French Market)
- Region (like Asia, Europe, United States)
- Sector (such as information technology, healthcare, financials)
You may have heard of stock indices such as the S&P500, the FTSE100 or the Dow Jones.
Let's take the FTSE100 as an example. The "Footsie" is a stock index of the top 100 companies listed on the London Stock Exchange by market capitalisation. Market capitalisation just means the size or how much the company is worth. In the image below you can see these 100 companies categorised by their sector. Oil & Gas and Financial companies make up a large proportion of the FTSE100. If the share prices of these companies rise on average, then the FTSE 100 index will rise with them. If the share prices of these companies fall on average, then the index will drop.
Why do we use indices?
Indices measure the performance of certain areas of the stock market, so traders and investors alike can use indices as an indication of how a region, market or sector is performing. For example, we can use the FTSE 100 as an indication of the performance of the UK market or companies in the UK. If the FTSE 100 begins to rise, then on average the share prices of these companies are rising. A rising FTSE 100 tells investors and traders alike that the condition of the UK stock market is improving. A healthy economy is good for stock market indices, so how stock indices are performing can be an indication of the performance of entire regions.
What are the major stock indices we offer?
| Country | Index |
|---|---|
| Australia | ASX 200 |
| China | China A50 |
| Eurozone | Euro Stoxx 50 |
| France | CAC 40 |
| Germany | DAX 40 |
| Hong Kong | Hang Seng 50 |
| Japan | Nikkei 225 |
| Netherlands | AEX25 |
| Spain | IBEX 35 |
| America | S&P 500 |
| United Kingdom | FTSE 100 |
| United Kingdom | FTSE 250 |
| America | Russell 2000 |
| America | Nasdaq 100 |
| America | Dow Jones Industrial Average |
| America | US FANG |
| Switzerland | CH 20 |
Most countries have one major index whereas the US has three:
The Dow Jones Industrial Average (DIJA)/Wallstreet
The Dow, also referred to as Wallstreet, is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The Dow is one of the oldest and most followed equity indices.
The S&P 500/SPX 500
Established in 1957, the Standard and Poor's 500 is a stock market index tracking the performance of 500 of the largest companies listed on the NASDAQ or the New York Stock Exchange. It is widely regarded as the best single gauge of the largest US equities.
NASDAQ-100/US Tech 100
Established in 1985, the NASDAQ-100 is a stock market index that tracks the performance of 100 of the largest non-financial companies listed on the NASDAQ stock exchange.
Creating & Trading Stock Indices
Indices are just synthetic numbers created to track a specific section of the stock market, you can't buy or sell them directly. There is no asset being exchanged between buyers and sellers, so to trade it you need to find a financial instrument which mirrors its performance. The most popular instrument traders use are derivatives.
Derivatives
Derivatives are financial products that derive their pricing from the underlying asset. Spread bets, CFDs, futures and options are all examples of derivatives.
Futures and Dailies
There are two types of contracts you can trade of a particular instrument. Say you want to trade the FTSE100, you can either trade a futures contract or a daily contract.
With a daily contract, it is at your discretion when to close the trade. If you do not set the conditions to exit the trade, this position will stay open indefinitely.
With a futures contract there is a specified expiration date. You can still close the trade before this, but the contract will expire at the expiration date and the trade will close. Futures contracts can be rolled over into the subsequent contract if you wish. Simply set futures contracts to automatically roll in your trade preferences.
Daily Contracts
Daily contracts roll over from day to day, as do any associated orders that may be included. Every night that a daily contract is open, you are subject to an overnight financing charge. Daily contracts are good for short-term trading as they tend to offer the tightest spreads.
Tighter spreads, smaller margins, and a provider quote that is simpler to compare to the underlying market are some benefits of daily contracts. It is possible to hold open daily contracts on indices during the times when the underlying index dividends are paid. For this reason, if you own a stake in an index that goes ex-dividend, dividend adjustments are applied to your account to reflect the dividend payout. Just as if you were holding the actual underlying index.
If you hold the position overnight, you will be charged overnight financing. This may be a debit or a credit. Any daily position maintained on a Friday night will incur a three-day financing charge to cover the nights held from Friday night to Monday morning. Find out how overnight financing is calculated.
Futures Contracts
In contrast to daily contracts, indices futures are derived from underlying live futures contracts that are traded in the market and have a specified expiration date.
You can close a futures trade at any time before the expiry of the contract just as you can with a daily contract. However, the price given for a futures contract will already account for any future dividend payments that are due between now and the contract's expiration date, as well as all interest rate charges. Futures contracts generally have a wider spread than daily contracts.
Spreadex offers you the option to roll a futures contract into the next contract month/quarter, for example, to close a June UK 100 Future contract and open a September UK 100 Future contract. This can be set to occur automatically in your trade preferences.
Commodities: What are they and how to trade them?
Commodities are raw materials or primary agricultural products that can be bought and sold, such as gold, oil, grains, or metals. Trading commodities involves speculating on their future price movements and this can be done by trading futures or spot contracts in the form of spread bets and CFDs.
