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Think of indices as baskets containing groups of shares. These shares are traded on a centralized
exchange such as the NYSE (New York Stock Exchange), NASDAQ, or LSE (London Stock Exchange), among
others. Indices traders have carte blanche to choose from many different options across America,
Europe, Asia, and Australia at Xtrade. Indices trading is the same as indexes trading – the words
are synonymous, but indices is the preferred nomenclature.
Indices are powerful performance measures of groups of stocks, and of the economy as a whole. The
constituent components of an index are weighted according to their importance in a particular index.
To gain a better understanding of indices trading, it's worth examining the factors that impact
stock prices in an index.
While every index is inextricably linked to the performance of its core components, knowledge of
indices trading is fully transferable across indices all over the world. An understanding of how the
FTSE 100 Index (a broad measure of the performance of the UKs 100 biggest companies by market
capitalization) trades will serve you well when trading regional and national stock market indices
around the world.
Many people are already familiar with national stock market indices such as: Canada (S&P/TSX
Composite Index), South Korea (KOSPI Index), Brazil (BOVESPA Index), France (CAC 40 Index), India
(BSE SENSEX Index), Italy (FTSE MIB Index), UK (FTSE 100 Index), Japan (Nikkei 225 Index), Germany
(DAX Performance Index), and China (SSE Composite Index).
It comes as no surprise that US stock exchanges dwarf their competition by a long margin. The top 10 stock exchanges by market capitalization in 2021 include the following:
Naturally, the indices of these countries will feature stocks with the highest market
capitalization, and generate the largest amount of trading interest. It's important to draw a
distinction between a stock exchange and a stock index. A stock exchange is a centralized location
where stocks are traded. A stock index is a gauge to assess the performance of the market.
Xtrade covers all the biggest indices trading markets for traders. These include the following
country-specific indices:
Now that you know exactly an index is, it's time learn how to trade indices online. Recall that
online trading is about buying and selling based on your speculative assessment of the future
direction of the index. If you're feeling bullish about the UK 100 index, you buy the index (go
long). If you're feeling bearish about the UK 100 index, you sell the index (go short). All indices
such as the Russell 2000, NASDAQ, USA 30, US Dollar Index, USA 500 index, US-Tech 100 Index have a
buy price and a sell price. Go long or short based on your assessment of the markets.
Would you believe that there are approximately 5,000+ US indices currently being traded? The US
equity market is bubbling over with indices for every imaginable group of stocks. The most heavily
capitalized indices are also the most heavily traded. These benchmarks of macroeconomic performance
are powerful financial instruments to include in your portfolio. As integral components of the
equities markets, indices provide behind-the-scenes insights into the health of the economy.
Recall that the pricing of indices is determined by a capitalization -weighted averages of the core
components of the index. What exactly does that mean? Take the NASDAQ as a case in point. This
represents 2500+ shares listed on the NASDAQ Stock Exchange. These are market
capitalization-weighted components. The constituent categories making up the NASDAQ include the
following:
Therefore, if you're looking to trade the NASDAQ composite index, your focus should be on technology
shares, consumer services, and health care. The other components, although significant, are much
less important in determining price movements for the NASDAQ composite index. Focus on the
components of the index that are more likely to impact pricing. With the NASDAQ, its technology
stocks and consumer services, and to a lesser degree healthcare.
The NASDAQ 100 is the index which is comprised of the most innovative companies on the NASDAQ. Focus
on the weighting of the top performing companies in the NASDAQ 100 in order to assess bullish or
bearish price patterns. Take a look at the following chart for detailed information into the
cap-weighted components of the NASDAQ 100 index:
These are the top 10 components of the NASDAQ 100 index. As you can tell the top 10 account for 52.6% of this particular index. Your strategy should focus on the most heavily-weighted stocks in the index. When Apple, Microsoft, and Amazon are booming, chances are the NASDAQ 100 index is moving in the same direction, and vice versa.
Contracts for Difference (CFDs) are derivatives instruments. Their value is derived from the underlying financial instruments that they are tracking. A CFD is a contract which mirrors the price of the index/indices you are trading. CFD trading allows you to go long if you're feeling bullish on the index, or to go short if you're feeling bearish on the index. Your profit or loss is calculated by the actual performance versus your prediction.
If you get it wrong, and prices move in the opposite direction, the degree to which the price moved will represent your losses. In a traditional trade, without a CFD in play, prices have to appreciate in order for profits to be generated. With CFDs, you can profit in rising or falling markets. By the same token, it is possible for CFDs to result in losses. Be cautious when trading financial instruments with derivatives.
One of the biggest bugbears for traders is capital availability. There simply isn't enough capital
to invest in every financial instrument you interested in, without running out of money. CFDs
present you with an alternative. With leverage, you're not using all of your capital to trade
indices. The margin requirement is small, thereby allowing you to diversify your portfolio into
different financial instruments such as CFD stocks, CFD Forex, CFD commodities, and CFD indices at
Xtrade.
We offer 20:1 leverage on indices trading. That means for every $1, you get $20 worth of trading
power on your chosen indices. This allows you to diversify into multiple financial instruments,
avoiding concentration in indices, or any other financial instrument. You've always heard about the
dangers of putting all your eggs into one basket – now you can actually understand what it means
with leveraged trading.
Perhaps you have substantial investments in technology stocks listed on the NASDAQ. You may want to
guard against losses by hedging through CFD indices. Recall that hedging strategies AK risk
mitigation strategies – are investments that protect against losses in other assets. If you are
trying to protect your traditional investments in AAPL, GOOG, FB, and AMZN, you may want to consider
shorting CFD indices.
While trading indices at Xtrade, you will encounter many useful tools along the way. These include
stop orders and limit orders, designed to automatically close positions if market conditions turn
against you, or closing positions if you get your preferred market price. By correctly predicting
the price movement of an index, you can certainly profit from CFD indices trading. To do so, you
must conduct the required technical and fundamental analysis using charts, graphs, and macroeconomic
variables. A caveat is in order: CFDs are inherently risky, so losses can certainly result. Trade
cautiously at all times.
Practice trading CFD indices on a demo account before you deposit and trade CFDs for real money
using leverage. There are many different factors that can impact indices prices. These include
geopolitical events such as political unrest, wars, embargoes, tariffs, elections, environmental
disasters, macroeconomic variables, financial reports, and the like. Overall, indices are certainly
much lower risk than individual stocks which are considered highly volatile.
The index itself can never going to liquidation, even if one of its core components fails. That's
because the failure of one component automatically introduces a new component to the index.
Conversely, the failure of an individual share that you have invested in will result in losses for
you. Not so with the index.
There are two ways that indices prices are calculated. One is a price -weighted index, where
companies with high share prices have a higher weighting on the index the other is a market
value-weighted index where the sum total of shares multiplied by price determines the importance of
the company in the index.
Now, you can use the full power of Xtrade’s indices trading platforms to your advantage. Learn to
apply your newfound knowledge of how macroeconomic variables impact indices pricing. Xtrade
WebTrader is a dynamo; this browser-based trading platform ensures an optimal indices trading
experience. We've also got
mobile trading apps
for Android, iOS and Tablet trading on the go.
Broaden your horizons and diversify portfolio with indices trading at Xtrade.
Get started with your Xtrade account today
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