Indices are the measurement of the price performance of a particular group of shares that are from an exchange. For instance, FTSE 100 comprises the 100 largest companies that London Stock Exchange has. Index trading allows you to get trading exposure towards the whole economy or a particular sector, without the need to open a lot of positions.
Index trading in CFD allows you to speculate on price movements, whether it rises or falls without the need to take ownership of the underlying asset. Indexes are also known to be a market that is highly liquid and has more trading hours compared to other markets in the trading industry. With Indexes on CFD, you will be able to achieve longer exposure towards some of the most promising opportunities in the market.
Identifying The Price Movement of Indexes
There are a number of factors that can affect the index price and it includes; economic news, company announcements, change in the index composition, company financial results, and commodity prices.
Economic events which include central bank announcements, investor sentiments, payroll reports, and all the other economic events in the financial work can affect the volatility which in turn affects the index prices.
When there are changes in the leadership of the company or company mergers, these will most likely affect the share prices which may lead to a negative or positive impact on the price index.
Change on the Index Composition
Weighted indices can shift prices whenever a company is removed or added. The traders will have to adjust to the new composition, resulting in changes in the index price too.
Company Financial Results
For companies having changes in their profits or losses, these will greatly affect the share prices that can either decrease or increase in size. These changes can also affect the price of the index.
Finally, there are commodities that have a huge effect on the index prices. For instance, in FTSE 100, 15% of the shares that are listed there are commodity stocks. Because of this huge percentage accounted for commodities stocks, any changes or fluctuations will cause positive or negative effects on the price of the index.
Advantages of Trading Indices
There are their advantages of trading index – go long or short, hedging positions, and trading with leverage.
You can go long or short
When you trade on indices, you can either go long or go short. When you go long, you are at the buying side, expecting that the market price will somehow rise. If you are going short, you are at the selling side, expecting that the price will fall.
Trading with leverage
Another advantage of trading indexes is you can trade with leverage. When you trade on leverage, you can open a huge position in the market without paying much or just a percentage of the total amount of investment.
When under a tight position, a trader can short their shares to protect them from losses. In case the market takes a downturn, the short position will have an increasing impact protecting from losses on the investment.