Trading indices is a common way to gain access to the stock market without directly trading individual shares or their price movements. Learn all about the potential benefits and risks of indices trading, and why Capital.com is the right place for it.
What are indices?
Indices are groups of exchange-listed stocks compiled to give insight into the performance of companies, wider sectors, and economies in general. The price of indices will rise and fall depending on the performance of the constituent stocks included on each index. Those that trade indices can gain exposure to a wide range of stocks, rather than just one or two. Consequently, indices trading is often seen as a way of diversifying a portfolio.
When it comes to how to trade indices, financial derivatives such as CFDs and spread bets, give leveraged exposure to the price movements of the underlying market, such as the US 500 ( and the Japan 225 (Nikkei 225), Australia 200 (ASX 200), CAC. It’s these movements that traders attempt to profit on when taking a position.
Why are indices important?
Indices are important because they act as indicators for key factors such as stock-market confidence, business confidence, the health of the wider economy, and the health of shares investments. When learning how to trade indices, it’s important to understand how these factors can both influence and be influenced by the movement of a given index.
Market analysts will often cite the impact fundamental events such as interest-rate decisions or GDP releases had or are expected to have on the price of certain indices. When trading indices, you should consider following such macroeconomic developments andinform your indices trading decisions by studying theeconomic calendar for the latest market-moving events.
Trading indices with leverage
Whether spread betting or using CFDs, indices trading enables you to trade with leverage, meaning you can control large positions with a relatively small amount of capital (known as margin). However, leverage can also amplify losses, so it's important to use it with caution and have a solid risk-management plan in place.
Major indices on Capital.com have a margin of 5%, meaning you only have to put down 5% of the total value of the trade, while being exposed to the price movements of the full position. The remaining 95% of the value of the trade is effectively advanced to you by us.
Let’s say you’re trading one CFD contract on an index at a price of 7,500. The total value of the trade is £7,500, but you’ll only have to put down £375 (5%) as margin. If the price increases by 30 points to 7,530, you will earn the full £30 profit. Similarly, if the price fell by 30 points to 7,470, you will incur the full £30 loss.
Overall, how to trade indices with leverage will depend on your trading strategy, risk tolerance and market conditions, so ensure you have a comprehensive trading plan in place that explores each of these crucial factors.
Why traders trade indices
Traders may choose to speculate on indices for a number of reasons, ranging from diversification to liquidity to pure speculation. Here are a few of the more common ones.
Speculation
You may trade an index purely to speculate on the direction of the overall market. This can be done using technical or fundamental analysis to make predictions about market movements and trade indices accordingly.
Diversification
Indices represent a broad range of stocks or assets from a particular market or sector. Trading indices allows you to diversify your portfolio and reduce individual stock risk. Instead of trading individual stocks, you can gain exposure to the overall market.
Liquidity
Major indices like the US 500, US Wall Street 30, or UK 100 (FTSE 100) are highly liquid, meaning there is a high volume of trading activity. This liquidity makes it easier to enter and exit positions at desired prices.
Access to global markets
You can gain exposure to international markets by trading global indices. For example, you can trade the Japan 225 to access Japanese equities or the Germany 40 for exposure to German stocks.
Risk management
Trading indices can be a way to manage risk by taking a position in the broader market rather than individual assets. This can help you avoid company-specific risks such as earnings reports or management changes.
Volatility
Some traders are attracted to the volatility of indices, as price fluctuations can provide opportunities for profit, although trading on volatility is a high-risk strategy that could lead to significant losses as well. You might want to employ strategies like day trading or swing trading to potentially capitalise on short-term price movements.
Popular indices to trade
There is a wide range of indices available to trade, which are sometimes calculated by different methodologies. For example, the lists the 500 largest businesses listed on American stock exchanges by market capitalisation, meaning the companies that are the among the largest by such a measure (e.g.Apple) are closest to the top.
By this methodology, the most-capitalised companies are also weighted more than companies further down the index, meaning that stock price fluctuations in the highest-placed companies may have an outsized impact on the wider index price.
Other indices, such as US Wall Street 30 (Dow Jones) are weighted by price, with the higher-priced stocks appearing closer to the top and, again, having a larger impact on the index value.
From the Germany 40 (DAX 40), to the Japan 225 (Nikkei 225), Japan’s benchmark index, to less commonly-traded indices such as the Switzerland 20 (Swiss Market Index), you’ll find the performance of stocks, industries and economies represented all over the world.
Learn more about trading popular indices such as Australia 200, VIX, CAC.
How to trade indices with Capital.com
You might want to hedge a liquid index such as the to try and spread your risk vs other global stocks you’re trading. Or maybe you may have specialist knowledge in a lesser-traded index that you feel gives you an edge when speculating on that market.
Whatever your preferred strategy, you can trade indices with Capital.com by following these steps:
- 1. Choose an index to trade, based on your trading goals
- 2. Choose whether to trade with a CFD or spread bet
- 3. Decide on your trade size
- 4. Consider applying a stop-loss to manage risk
- 5. Open your position long or short
- 6. Manage your position, monitoring fundamental and/or technical drivers
- 7. Close your position
Costs involved in indices trading
As with all of our markets, when you trade indices with us, you’ll pay a spread, which is based on the difference between the buy price and the sell price of the market. For example, if you’re trading the US 500, our spread is 1.7 points, which you will pay on the opening and closing of the trade. The buy and sell prices look like this:
You may also pay additional fees, for example if you use a guaranteed stop-loss or if you hold a trade overnight. As with all Capital.com instruments, you won’t pay any commission when you trade indices.
Indices trading examples
It’s advisable always to make sure you’re aware of the cost of trading before you open a position. You can do this via our charges and fees page.
US 500 spread bet
- Let’s say you want to spread bet on the US 500 ( index at a price of 4,500.
- After conducting some fundamental analysis on the market, you think it will rise. You open a spread bet long on the US 500 worth £10 per point of index movement. Your position is worth £45,000 (10 X 4,500) but with just a 5% margin on indices, you only have to put down £2,250.
- Over a few hours, the index rises by 30 points to a price of 4,530 and you close the position.
- You’ve made a profit of £300 (30 X 10), minus the spread cost and any additional fees.
US 500 CFD trade
- Now let’s say you want to trade a CFD on the same market at a price of 4,500.
- After conducting some fundamental analysis on the market, this time you think it will fall. You open a CFD trade short on the US 500 of 10 contracts, worth £45,000. Again, with just a 5% margin required, you only have to put down £2,250.
- Over a few hours, the index falls by 30 points to a price of 4,470 and you close the position.
- You’ve made a loss of £300 (30 X 10), minus the spread cost and any additional fees.
Indices trading benefits with Capital.com
At Capital.com, we’re proud to have won a range of awards from some of the leading authorities in the trading world. We’re rated Excellent on Trustpilot, and we’re always working to improve the experience of our 520,000+ clients. Here are just a few reasons to choose us for your indices trading.
- Clear, easily-navigable interface across desktop, app and tablet
- Rapid withdrawals*
- Multiple chart types and 75+ technical analysis tools
- Insightful education via courses, videos and webinars, as well as an in-platform, asset-specific Reuters feed
- Round-the-clock support
So why not join our growing customer base and trade indices with us today.
Get started with indices trading.
*98% of withdrawals are processed within 24 hours, according to our internal server data from 2022.
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