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A Guide for Trading Stock Indices

ByDave Stopher

Jul 8, 2021

If you want to make money quickly, one of your best options lies in trading on the stock market. When most people hear of the stock market, they only think of trading income, cyclical, defensive, tech, blue-chip, and growth stocks. Though these are the most commonly traded on the stock market, you have multiple options for making money on it.

This guide: https://tradingguide.co.uk/short-trading-guide/ can help you stay connected to the market and execute your trades fast. The site also reviews the leading stockbrokers for different trade options, so it eases finding one that suits you. One place where you need speed on the stock market is when trading indices.

Though profitable, few people understand what trading indices entails and how they can benefit from it. Here is a guide on what this stock market option encompasses.

What Are Indices?

Indices are the appraisals for the price performances of stocks in specific exchanges. They track how well or dismally company stocks perform in their particular stock exchanges. A stock index captures the general tone of a stock market so that you know what you should invest in and what is best to steer clear of.

For example, one of the highly traded stocks worldwide is the FTSE 100 Stock Index of the London stock exchange. This tracks a hundred large list companies according to their market caps. Other popular indices in the stock market include the Nikkei 225 in Japan, the Dow Jones in the U.S, the CAC 40 in France, the Dax 30 in Germany, and the Ibex 35 in Spain.

What Is Indices Trading?

Before defining indices trading, keep in mind that you cannot directly trade on an index. This is because the index is a set of companies or securities representing a sector rather than a product by itself. In indices trading, investors reap profits from the changing prices of various indices in the global market.

Index trading entails buying and selling specific stock market indices. An investor speculates the price of an index to determine whether it is worth buying or selling. When buying or selling an index, you are trading an average performance of a specific group of stocks rather than the actual underlying stocks. When the share prices of companies within an index rise, this increases the index’s value and vice versa.

Steps of Trading Indices

Once you have decided that trading indices sounds beneficial to you, here are the typical steps you will take to trade.

  1. Choose whether you want to trade index futures or cash indices. Cash indices are bought and sold at a spot price and favored by short-term traders like day traders. Index futures are bought and sold at a futures price, meaning the price you agree to pay later. Long-term investors prefer them.
  2. Create an account with your stockbroker.
  3. Pick the stock indices best suited for your investment and appetite for risk.
  4. Set limits and stops. These are essential tools for managing risk in indices trading. Stop orders automatically close your position when an index’s price falls, while limit orders close the position when the price rises.
  5. Open your trade and monitor how well your indices perform. You close the trade when you want to cut your losses or take your profits.

Advantages of Online Indices Trading

Like most things on the stock market, indices trading has largely moved online. Below are a few advantages of using an online broker to trade stock market indices.

  • An index’s price does not rely on one company. As such, it is less risky and more stable compared to buying or selling stocks from a single company. While one company’s share price might fall significantly or even be suspended, an index is spread out, so this does not affect the index price much. With indices trading, you diversify your risk.
  • Trading indices allow you to speculate on a country’s economic evolution or a stock market in general rather than on the companies which comprise an index. Generally, there is more information on what affects an index than what affects one company’s stock. It thus becomes easier to decide how to trade without going into detailed analyses of different stocks.
  • Online indices trading has low capital requirements since it uses leveraged products called CFDs. As such, with a small deposit called a margin, you can trade with larger capital and gain higher profits.

Online indices trading is currently a popular investment option for people worldwide. Making profits primarily depends on managing your risk. Though it might seem easy, pick your online indices trading broker carefully. He/she should have the required licensure for the trade and support the payment option you want to use. It is also prudent to get one whose trading platform offers round-the-clock customer care support in case you have issues with your trade.