A stock market index, such as the FTSE 100 or S&P 500, is a listing of publicly traded companies, usually ranked by market capitalization. For example, the FTSE 100 Index is a list of the top 100 companies by market cap on the London Stock Exchange. As the stock prices of these companies rise and fall, their movement causes the index they are listed on to flutter a bit too. Therefore, in its simplest definition, indices trading is just the trading of a group of selected stocks that are clustered together, generally on one of the world’s major stock exchanges.
As with stocks, currencies and other assets, there are lots of ways to trade indices. However, you don’t invest in an index in the same way as you would buy stocks, because an index is more of a mathematical construct used to describe performance of a collection of companies.
You can invest in an index via mutual funds, tracker funds or derivatives. The latter, which includes the innovative CFD (contract for difference), is one of the most popular methods of indices trading online.
Like other investments, indices trading involves a degree of speculation on whether the index will rise or fall. Trading CFDs lets you take advantage of that uncertainty. For example, if you go long, you believe the index will rise in a given timeframe. Alternatively, you will go short, which is another way of saying short selling, if you believe the index will fall in value. For instance, if the FTSE 100 was priced at 7,257.00, you might take a short position on it falling by the end of the day. If the FTSE 100 fell to 7,157.00, you would make a profit.
Of course, it’s important to remember that all trading can be impacted by a variety of economic, technical and political factors. Understanding these aspects can make the difference between successful trades and unsuccessful ones. If you don’t have the knowledge you think you need to be a successful trader, invest in picking up the information you’re lacking.
Be sure to use the wealth of resources on our platform to help you make smarter and more informed trades on stock market indices and other assets.