Is index trading safe?

Your guide to index trading

Why is index trading important to traders?

A stock market index is a valuation of the composition of stocks that tracks and evaluates the performance of a specific market segment, region or country economy in general.

The majority of advanced and growing economies have at least one financial index. For example, the S&P 500 index is made up of stocks in the top 500 companies in the United States. At 70% of the total financial value of the US stock market, the index provides a good outlook on the state of the entire US stock market.

 

Why should one trade indices?

Index trading is a relatively safe form of trading with built-in money management. The risks of index trading are always lower than the risks of investing in individual stocks.

  • Indices are the least manipulative financial instruments. The index price changes depending on the price fluctuations of the member companies that make up the index.

  • Integrated money management scheme. With index trading, you don't bet everything on one card. With the NASDAQ 100 index, you can diversify into the most prominent American high-tech companies. Choosing CAC 40 means getting involved in petrochemical industries.

  • Low risks. Although indices can also be volatile due to factors such as geopolitical events, economic forecasts, and natural disasters, a 10% loss or gain on an index is always a major historical event that gets media attention.

  • No risk of bankruptcy. Unlike sole proprietorships, an index cannot go bust. If a DAX 30 constituent goes bankrupt, it will be replaced by the 31st company on the list of leading German companies. However, if you own stocks in the business, you will automatically lose your investments.

  • Benefit from the global economic situation. Investing in a basket of companies takes advantage of both the positive and negative dynamics of the global economy. If a company fails, the index can still go up.

How to trade CFDs on indices

Index trading is a way of gaining access to global or regional markets without having to analyze the performance of individual companies. Popular stock market indices usually offer traders high levels of liquidity, long trading hours, and tight spreads.

One of the easiest and most popular types of index trading is with CFDs (Contracts for Difference). A contract for difference (CFD) is a type of contract between a trader and a broker to benefit from the price difference between opening and closing a trade.

When trading indices using CFDs, you can go long or short without interacting with traditional exchanges. You trade directly with your CFD broker. Regardless of whether your assessment of the index expectation and forecast is positive or negative, you can try to profit from either rising or falling future price movements.

Composed of a broad cross-section of liquid trading instruments, indices are extremely popular with traders from around the world.

How are the largest indices calculated?

Before we entered the digital era, indices were calculated as simple averages: the prices of all constituents were summed up and divided by the number of companies. Today that approach can seem too simple. Back then, however, it met the requirement by providing a reliable outlook on the strength of a given market.

Today's index values ‚Äč‚Äčalso change depending on fluctuations in the value of the individual stocks they are based on. However, indices use the two big formulas to determine prices:

  • Market value weighted indices

Market-weighted, or capital-weighted, indices are calculated based on the total market value (capitalization) of the constituents. This means that the largest companies have a greater impact on the index. Market-weighted indices include, for example, FTSE 100 and DAX 30.

Price-weighted indices are calculated using the constituent's share price. This means that companies with a higher share price have a greater impact on the overall index price. An example of a price-weighted index is the Dow Jones Industrial Average.

Trading CFDs on Indices: Why Capital.com?

Advanced AI technology at its core: A news feed like on Facebook offers users personalized and unique content that corresponds to their preferences. If the trader makes the decisions that are based on a bias, the innovative SmartFeed offers a range of materials to get him back on track. The neural network analyzes the behavior in the app and suggests videos, articles and news that will help optimize your investment strategy. Hopefully this will help you hone your approach to trading the world's most popular stock market indices.

Trading on margin: With the offer of margin trading (20: 1 for the largest indices), Capital.com grants you access to the NASDAQ 100, DAX 30, FTSE 100, Dow Jones 30, S&P 500, CAC 40, Hang Seng 50, ASX 200, Euro Stoxx 50, Amsterdam AEX 25 and many other indices with the help of CFDs.

Trading in Contracts for Difference: When trading CFDs on indices, you are not buying the underlying asset itself, which means you are not tied to it. You are only speculating on the rise or fall of its price. CFD trading is no different from traditional trading in terms of the strategies involved. A CFD investor can go short or long, place stop-loss and stop-limit orders, and use trading scenarios that suit his or her goals.

All-round trade analysis:The browser-based platform allows traders to use fine technical indicators to create their own market analysis and forecasts. Capital.com offers live market updates and various graphic formats, and is available for desktop, iOS and Android.

Focus on security: Capital.com pays special attention to security. Approved by the FCA and CySEC, it complies with all regulations and ensures that customer data security is paramount. The company enables the money to be withdrawn around the clock and keeps the merchants' funds in separate bank accounts.

What are the world's most traded indices?

There are a variety of indices that are focused on specific market segments and stocks. The world famous Dow Jones Industrial Average includes the stocks of the top 30 players in specific industries.

Some of the world's most popular indices are: S&P 500 and NASDAQ 100 (New York), FTSE 100 (London) and DAX 30 (Frankfurt), AUS 200 (Sydney) and Nikkei 225 (Tokyo), CAC 40 (Paris) and Euro Stoxx 50 .

 

In general, there are 3 common types of indexes: global, regional and national.

Index typedescriptionLeading indices
Global stock market indices
Track stocks from around the world.
E.g. the MSCI World Index comprises stocks of large and mid-cap companies from 23 developed countries.
Dow Jones Global Titans 50
Regional stock market indices
Track stocks of specific regions.
These indices can be European,
Reflect Latin American, Asian stocks, etc.
  • S&P Asia 50 index

  • FTSE ASEAN 40 index

  • S&P Latin America 40 Index

  • FTSE Euro 100 index

  • Euro Stoxx50 index

  • S&P Europe 350 index

National stock market indices
Track stocks of individual countries.
The top 10 national indices consists of:
China: SSE Composite Index
United Kingdom: FTSE 100
India: Bombay Stock Market Index
Brazil: Bovespa stock index
Canada: S&P TSX 60 Index
South Korea: KOSPI Index

Index trading: historical data

The very first stock market index was developed and introduced in the United States in 1885. Wallstreet Journal editor and co-founder of Dow Jones & Company, Charles Dow, began tracking the average change in market prices for the top 11 industrial companies of the time. Since 1928, the Dow Jones Index has been calculated as an index of the 30 notorious companies on the US stock market.

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