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Welcome to the exciting world of index trading. If you thought that trading indices in the form of CFDs required special skills or a degree in finances, think again. Trading indices as CFDs is no more complicated than trading commodities, shares or currencies in the form of CFDs. The main difference is that with indices you are investing in a "basket" of instruments, rather than a single one. Confused? Don’t be. Let’s start at the beginning and you’ll quickly understand the basics of this unique tradable instrument.
That’s a good question, but before we answer it, we need to explain what an index is. In online trading, a stock market index is a measurement of a specific section of the stock market. Its price is usually derived from the prices of selected stocks. This means that instead of investing in the price of one specific share, by trading an index you can invest in the price of several shares at once.
Indices are not just tradable instruments, they’re also sources of information. Because indices are composed of several shares (in some cases hundreds of them), they offer useful information regarding the market and its performance over time.
When you trade with iFOREX, you don’t invest in the actual index, but rather in a financial instrument that is based on the index, in the form of CFDs. CFD, of course, stands for Contract For Difference, and through CFD trading you can invest in the price of a financial instrument without actually owning it.
Want to learn more? Drop by our CFD trading page.
Well, we kind of covered this in the previous section, but in case you’re still unsure, here’s a quick comparison between trading share and index CFDs. Just remember: One instrument is not "better" than the other, they’re just different.
Allow us to explain: you will not, in any circumstance, be required to calculate an index on your own. Luckily for all of us, indices are calculated automatically, usually by a weighted average. What’s a "weighted average", you ask? It simply means that each share influences the index in proportion to the price of a single share. Shares with a higher price get more weight and will therefore have greater influence over the index’s price. Makes sense, right?
While you don’t need to do the calculation (we promised you wouldn’t), in some cases it is useful to know which shares have greater influence over a specific index.
When we compared share CFD trading with index CFD trading, we mentioned "leverage", but what is leverage and how do you use it? Leverage trading allows you to open large deals with a relatively small investment. When you trade index CFDs with iFOREX, your maximum leverage is 200:1. This means that with a €500 investment, you can open a deal worth up to €100,000. Why? Because:
500 x 200 = 100,000
Leverage is an extremely popular and useful tool, but remember: While Leverage essentially "boosts" your trading power, it also involves greater risk to your investment and should be used with care.
Are you now ready to open your first index CFD deal? Fantastic. Here is an example of how to do it in three steps.
Close your Germany 40 deal and collect your profit
Let’s say that in our example the price of the Germany 40 rose from 10,707 to 10,757 and you decide to close your "Buy" deal.
|Number of Germany 40 contracts||9|
If you feel we’re going too fast and want to learn the basics of online trading, you can start here.
As we explained earlier, at iFOREX you don’t actually invest in the indices themselves. Instead, you trade financial instruments that are based on the indices in the form of CFDs. In this section we will mention some of the world’s most popular indices and then explain which iFOREX instruments are based on them.
The US economy is a powerful and influential one, so it’s no wonder that the US indices are carefully monitored. Here are a few of the leading US indices.
The Dow Jones Industrial Average
This is a great index to start with. Commonly referred to as "the Dow Jones" or in an even shorter form "the Dow", this is one of the world’s most popular US stock indices. Founded way back in 1896, the Dow includes 30 of the largest publicly-traded companies in the United States including Apple, Disney, Coca-Cola, IBM and many others. At iFOREX, you can invest in the US 30, which is based on the Dow Jones Future index, in the form of CFDs.
The NASDAQ 100
You must have heard of the NASDAQ before. This index lists the 100 largest, most actively traded companies on the NASDAQ stock exchange. The NASDAQ’s composition has a reputation for being weighted towards information technology companies. At iFOREX you can trade the US Tech 100 in the form of CFDs. This financial instrument is based on the NASDAQ 100 Future index.
Many people believe that the S&P 500 (Standard & Poor's 500) is an accurate indicator (perhaps even the most accurate indicator) for large-cap American equities. This index is composed of 500 large, publicly traded companies that are traded on either the NASDAQ or NYSE. Some people believe the S&P 500 serves as an indication regarding the current and future state of the US economy. iFOREX allows you to trade the US 500, which is based on the performance of the S&P 500 Future Index, in the form of CFDs.
With the EU playing an important role in the global economy, many European indices serve as an insight as to how the different countries within the EU are performing. Here are a few of the most popular European indices…
The DAX 40
Germany is certainly one of the most influential players in the European economy and the DAX 40, the leading German index, is extremely popular among investors. The DAX (Deutscher Aktienindex) consists of the 40 largest German companies traded on the Xetra Frankfurt Stock Exchange. Want some examples? Daimler, Adidas, Volkswagen, BMW and Lufthansa are just some of the names on the list. These are powerful companies, accounting for roughly 75% of the value of the Frankfurt Stock Exchange. At iFOREX you can invest in the Germany 40 in the form of CFDs. The Germany 40 is based on the performance of the DAX 40 Future Index.
The CAC 40 index is the leading benchmark for Euronext Paris. Can you guess how many companies are included in it? That’s right: 40, and they are viewed as the most representative of the economic sectors quoted on the Euronext Paris market. None of the companies on the index can account for over 15% of the index’s value. At iFOREX, you can invest in the France 40 CFDs, a financial instrument that is based on the performance of the DAX 40 Future Index.
EURO STOXX 50
Also known as the "Dow Jones EURO STOXX 50", this is a market capitalization-weighted stock index. It includes 50 large, blue-chip European companies, all operating within Eurozone countries. If you would like to expose your portfolio to the European market, you can check out the Euro 50, a financial instrument that is based on the performance of the EURO STOXX 50 Future Index.
The Asian market is becoming increasingly influential in the global economy, and it certainly has massive growth potential. Here are a few leading Asian indices, which you might find interesting.
This highly-popular Japanese equity index is composed of the 225 largest companies on the Tokyo Stock Exchange (TSE), which – if you want to be exact – is currently part of the JPX (Japan Exchange group). It includes leading Japanese brands such as Mitsubishi UFJ, Nissan, Honda and Fast Retailing. At iFOREX you can invest in the Japan 225 CFDs. This financial instrument is based on the performance of the Nikkei 225 Future Index.
Hang Seng 50
This Hong Kong index monitors and records daily changes of the largest companies of the Hong Kong stock market. It is seen by many people as a leading indicator of the Hong Kong market’s performance. The 50 companies included in the index account for roughly 58% of the capitalization of the entire Hong Kong Stock Exchange. If you’d like to expose your investment portfolio to the Hong Kong market, you can trade the Hong Kong 50 CFDs, a financial instrument that is based on the performance of the Hang Seng 50 Future Index. Okay, hang in there – we have one more Asian index to go.
Interested in the Indian market? The Nifty 50 index has become the largest single financial product in India. It includes over 20 sectors of the Indian economy, making it a great instrument for those looking to expose their portfolio to the Indian market. At iFOREX you can invest in the India 50, which is based on the performance of the Nifty 50 Future Index, in the form of CFDs.
Reading back, you might think that all the indices in the world are kind of the same, each made up of a bunch of shares. While it’s true that in most cases an index is a stock market index, not all indices are composed of shares. There are some exceptions, and here are just a couple of examples…
The VIX index is one of the most unusual indices out there, because it doesn’t measure price, but rather speculated volatility. To be more accurate, this index is a measure of the implied volatility of S&P 500 index options. Still confused? Basically the VIX attempts to answer the question "how volatile do investors feel the stock market will be over the next 30 days?".
Historically, when the market is restless and investors expect high volatility and instability, the VIX rises and when the market is calm and stable, traditionally the VIX falls. This is why this index is also known as "The Fear Gauge". It is viewed as measuring market fears.
The USDX is a particularly interesting index because it deals with currencies, not shares. How is it different than forex trading? We’ll explain.
When you trade the EUR/USD for example, you simply trade the euro against the dollar. However, when you trade the USDX, you essentially invest in the US Dollar not just against one currency, but against a basket of currencies. Six of them, to be exact. The currencies in the basket are the Euro, Japanese Yen, Pound Sterling, Canadian Dollar, Swedish Krona and the Swiss Franc. Not all of the currencies are represented equally though. The Euro has over 55% weight in the basket, making it the most influential currency of the six.
The USDX allows you to potentially benefit from the strength – or weakness – of the USD.
To see our full list of indices and other tradable instruments, visit our trading conditions page.
Many factors affect the price of indices, and you can probably guess why. When you trade a currency pair, there are two instruments directly involved. When you trade an index, there are many instruments that can affect the index’s price.
As our long list of examples also demonstrates, there are loads of indices and they’re not all the same. An index like the USDX is likely to be most affected by a change in the euro, while the US Tech 100 (which is based on the performance of the NASDAQ 100 Future Index), is likely to be more heavily affected by a change in technology shares.
Here are just a few examples of factors that could play a role in the price of common indices:
Want an example of how a major market event can affect an index? Take a look at what happened to the US 30 on November 9th 2016, a day after the US Presidential Election. Donald Trump’s victory took the market by surprise and the US 30 index started the day with a major drop brought about by the uncertainty that accompanied the results. Before the end of the day though, as sentiment changed, the US 30 rose again.
You might be thinking "who cares? The index bounced right back". While this is true, the fact that the index rose again doesn’t really matter. You see, for online investors any change in the price of an index – up or down – is an opportunity. Investors who recognize the impact of a major economic event and act fast, can stay ahead of the market and potentially profit.
Want to stay informed about major economic events? Start off by following our economic calendar as well as our daily news and analysis.
Index trading is a great tool to sample the top shares of specific types, or similar things in edge cases, to see how well the top companies of a certain market perform over time. Because it's a grouping of multiple shares, it's less risky than them. Although, the bigger shares in the index do have more weight to them. Like other instruments, it's wise to follow economic news to better forecast how that instrument will be traded soon.
Because of indices' relative steadiness compared to individual shares or forex, it can be seen as a safer investment. This makes it a popular candidate for leveraging to increase the instrument's revenue from a smaller investment. Still, it's smart to use features like Take Profit and Stop Loss to minimize risks. And, it might be more profitable to trade riskier instruments because their fluctuations mean possibly greater gains, but also greater losses. This means that you may want to be forex trading, index trading, and trading other instruments simultaneously according to the risk you're comfortable with.
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