Get exposure to global indices with CFD trading
Indices are essentially a group of stocks that are compiled by major financial institutions or hedge funds with the aim of tracking the overall performance of a market segment. The flexibility of CFD trading also allows traders to speculate and profit from movements in major indices without owning any of the underlying stocks.
Also, stock market indices can serve as a benchmark that tracks the strength and performance of a basket of stocks that are traded on stock exchanges around the world, making it easier to understand how an entire sector or country is faring.
Strong performances from multiple companies in a particular index will undoubtedly translate to a price jump, however, depending on the weight of each stock – the performance of a single company can have a positive or negative effect on the value of the entire index.
The three types of indices
There are three major categories of stock market indices: global, regional and national.
A global stock index is a compilation of stocks from a variety of industries in several countries across the world. Notable examples include the S&P Global 100, the FTSE All-World index and Russel Global index.
Regional indices, as the name suggests, track the performance of stocks in a specific region. This type of indices is incredibly helpful in terms of gauging the strength of the region as well as comparing the health of a particular country’s economy against that of the entire region itself. Traders who want to diversify their portfolio with companies in Asia or Europe can trade the Dow Jones Asian Titan 50 index or the FTSE Euro 100 index respectively.
National indices are those that are exclusive for companies based in a specific country. The S&P 500 and Dow Jones Industrial Average index or DJIA are two of the largest indices worldwide and both follow some of the best-performing companies in the U.S.
The most widely traded Indices
While choosing the most suitable index for your portfolio is completely dependent on your risk tolerance and investment objectives, below you can find a list of the top traded indices across the world.
- The top of the list is dominated, of course, by the Dow Jones Industrial Average index. The DJIA is one of the oldest and most established indices in the world as it has been around since the 19th century.
The DJIA index tracks 30 of the best performing companies in the U.S.
- Next up is the S&P 500. The S&P 500 is actually one of the most well-known indices worldwide and for good reason. You can find 500 of the largest companies in the U.S in this index which represents 80% of the total stock market capitalization in the region.
If you are interested in the U.S economy or even want to trade the dollar, the S&P 500 is a great indicator of its current performance.
- The NASDAQ 100 represents the top stocks in the tech sector that are listed in the NASDAQ U.S stock exchange. Traders that want to gain exposure into tech giants such as Apple, Facebook, Google and Amazon need look no further.
However, prospective traders should also be aware that this is one of the most volatile and high-risk indices due to the volatility and competitive nature of the underlying industry. The higher the risk, the higher the potential reward though, so it’s advisable that you make risk management your top priority before you start trading this index.
- Moving on to indices that cover the London Stock Exchange Stock – the Financial Times Stock Exchange 100 Index or FTSE 100, consists of the 100 largest companies by market cap listed in the LSE.
While the companies in the FTSE 100 are based in the UK, their revenue mostly comes outside the country and therefore does not provide an accurate representation of its economy.
- Japan’s most traded index is the Nikkei 225 and one of the best metrics regarding the current status of the Tokyo Stock Exchange and the overall health of the country’s economy.
The Nikkei 225 comprises 225 of the top companies in Japan from a variety of different industries.
Why you should trade index CFDs
The most important benefit of trading indices compared to individual stocks is the reduced risk exposure to the markets. Since you aren’t solely speculating on the value of a particular company’s stock, your trade won’t be affected considerably if a company’s stock suffers from weak revenues.
It would take a devaluation of multiple companies in the index for your investment to translate to a loss and therefore indices can be a great asset for managing risk especially if you want to invest in a company that is considered as high risk.
Aside from the direct benefits they provide to indices traders, these indices can be utilized by forex and commodity traders as well since they also offer invaluable insights regarding the state of the economy and the stock market in a country or region.
Therefore, even if you aren’t interested in trading index CFDs, you should still keep an eye on their performance as part of your trading strategy.
Trading indices with CFDs (contracts for difference) provides the additional benefit of the capability to speculate on rising and falling prices. CFD traders enjoy opportunities to profit regardless of whether the value of an index is going up or down.
For example, if some of the companies in the technology sector in the U.S are struggling to meet their quarterly targets, you can easily sell or short the NASDAQ 100 index and realize a profit if your speculation proves correct and the index starts declining in value.