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- Indices are financial securities that track performance among groups of companies, often reflecting the state of a specific economy or a single industry.
- Traders can buy and sell indices as contracts for difference (CFDs) to avoid risks that come with owning underlying assets.
- CFD is an agreement between two parties to exchange the difference in the value of a security, and it lasts until one party decides to terminate it.
- Indices are calculated in several ways, depending on the market and index board, but most notably using the track market capitalisation of several high-performing companies.
- Index traders need a reliable broker that offers a practical trading platform, competitive spreads and trading education.
Do you like investing and trading stocks but find the process time-consuming? If so, indices may be your answer. Indices are financial instruments that are traded as one unit but measure the performance of many stocks, usually a whole industry. Investors can get into the market without researching individual stocks or worrying about managing a diverse portfolio with several stocks or currency pairs. We look at indices and how can you trade them online next.
What are Indices?
Indices—also known as index funds—are market benchmarks that measure the performance of a particular industry or group of companies. The best-known indices include the Dow Jones Industrial Average and S&P 500, which often serve as the basis for many investment strategies. Dow Jones comprises 30 top-performing US companies selected by either editorial committees or based on stock market capitalisation. S&P500, as the name says, is comprised of the top 500 companies in the United States. ASX200 tracks top-performing 200 companies in Australia. Traders can invest in whole markets instead of individual stocks. Indices are generally seen as low-risk investments compared to individual stocks and other securities. Indices can brush paint a picture of one whole economy. Both S&P500 and Dow Jones measure the performance of a group of stocks which can be used to gauge how well a country, or an individual industry is doing in current circumstances.
How are indices calculated in global stock markets?
Indices are calculated in several ways depending on the market and index board. For example, some indexes calculate their values by averaging prices of stocks within an industry or sector; others use a weighted average to measure changes over time for multiple securities like bonds, commodities futures contracts and currency exchange rates. Let us take Australia’s S&P/ASX 200 index fund as an example. The Australia 200 index fund is calculated based on the performance of the largest publicly traded companies in major industries that are domiciled, headquartered or listed on a stock exchange located in Australia. Standard & Poor’s credit agency maintain the ASX200, using market capitalisation and float adjustment to include the largest Australian companies. ASX200 index reflects the overall state of the Australian economy.
What is a CFD index fund?
Investors sometimes invest in CFD indices, looking to avoid risks associated with owning underlying assets of an index fund. Profits from CFD trading are not taxed in the same way as regular capital gains, and some losses can be claimed as tax-deductible expenses, depending on the country that collects the tax. CFD is short for contract for difference. It is an agreement between two parties to exchange the difference in the value of a security at some point in time. The long position holder will pay the short seller when they agree on a price and vice versa. This agreement lasts until one party decides to terminate it by closing their position or reaching an expiration date set in advance. In a nutshell, both traders bet on the price movement of a certain index without owning the asset.
What are the most popular CFD indices?
Rakuten’s trading platform is home to some of the most popular CFD indices. Investors usually trade with Australia 200, EuroStock 50, France 40, Germany 30 (DAX), Hansen 50, Japan 225, UK 100 (FTSE 100), US SPX 500 (S&P500), US Tech 100 (NASDAQ 100), and Wall Street 30 (DIJA).
- US Tech 100 (NASDAQ 100) tracks the biggest non-financial companies in the United States, including Amazon, Google and Apple.
- UK 100 (FTSE 100) measures the performance of top companies registered in the United Kingdom, including Vodafone and HSBC.
- Germany 30 (DAX) reports performance from the largest companies listed on Frankfurt Stock Exchange. These include Adidas, Allianz and Volskwagen.
Why trade CFD indices?
CFD indices are a popular choice for all kinds of investors. These financial instruments offer the opportunity to trade on a diverse range of markets. Traders can use leverage and superior liquidity to execute both short and long-term investments. Brokers that offer CFD services require traders to put only a small amount of the total position but let them keep 100% of the profits, and vice versa.
How to start trading Indices?
Indice traders need a reliable and trustworthy broker. Open a demo or live account to place your first bet. Rakuten Securities Australia offers a competitive spread, an easy-to-master trading platform, and financial education through content and support. Indice traders follow a range of economic news and indicators to determine the price movement of an index fund.
- Political and economic news. Unexpected events can affect the whole market. The first sign of the COVID-19 pandemic in America wiped out 9.99% of the S&P500 index almost overnight.
- Company’s financial reports. Publicly traded companies report revenue, profits, losses and structural changes within the company. These indicators can sometimes affect the performance of the entire fund.
- Commodity prices. ASX200 lists several large companies which depend on the price movement of coal and iron ore. Change in commodity prices can affect the performance of top corporations and subsequently affecting the whole index fund.
How to start trading CFD indices from Australia?
You can start trading indices today with as little as $50. Conversely, open a demo account to practice in a risk-free environment before investing real money.
- Open your account with Rakuten Securities Australia and download the award-winning MT4 application.
- Check up on our education content to learn about viable investment strategies. Pick your indices.
- Decide whether you are going long or short on your investment.
- Include stop/loss and take/profit orders. These limits help traders maximise profits and curb common capital risks associated with trading.
- Execute your first order and keep track of your investment.
Start trading today
Indices are financial instruments that allow you to trade the performance of stocks without worrying about deciding which individual stock to buy or sell. You can invest in an entire industry by buying just one index, including the Australia 200 or Dow Jones Industrial Average. Discover how to create your strategy with our educational content and create your trading strategy. If you want to start trading today, sign up for the forex account now and invest with the leading global broker you can trust.