What Are Indices and How does It Work?

Indices trading are a measure of the price performance of a group of shares from an exchange. If you trade indices, you will be able to gain exposure to an entire economy or sector at once through a single position. 

It is also possible to speculate on the price of indices that rise and fall actually owning the underlying asset with the help of CFDs. Indices is an extremely liquid market that also comes with more trading. You may also get longer exposure to potential opportunities. 

Index trading

Index trading refers to the buying and selling of a specific stock market index. Investors speculate on the rates of an index that might rise or fall. On the basis of this, they determine whether they will buy or sell. An index is the performance of a group of stocks. Therefore, rather than buying actual underlying stock, you invest in the average performance of the group of stocks. When share prices for the companies within an index go up, the value of the index also rises. On the other hand, if the price tumbles, so will the value of the index. see more here in wikipedia.

There are two main ways of trading indices online: index cash CFDs and index futures CFDs. The key difference between the ‘cash’ market and ‘futures’ market is that the ‘cash’ comes without an expiry date. In the ‘futures’ market, the expiry date is known as a ‘rollover’. A futures contract is basically an agreement between the buyer and the seller on the price that the buyer will pay out at a predetermined date in the future. 

How to calculate stock market indices?

Calculating the stock market indices prices is simpler in the digital world. It can be done with ease using methods like market capitalisation and the price weighting formula.

Market capitalization = Current market price per share x Total number of outstanding shares

Market capitalisation is a more common method, which refers to the worth of a  company’s stock by total dollar market value. Multiply the number of outstanding shares by the current market value of a single share from the company to determine the dollar market value. This method gives greater weight to organizations that have higher share prices. It further implies that changes in their values will have a larger effect on the current price of the stock index it’s a part of.

Minimum money you need to start trading indices?

You should take two major things into account when trading indices online: 

1. The amount required to open an account: Most platforms are likely to ask you to deposit a minimum amount to open an account but there are also some good options where there are no such criteria. But do make sure that there are enough funds in your account to carry out trades. 
2. Margin provided: How much margin does your platform require? Most platforms would ask you to post a relatively high initial margin, which should typically be maintained. However, the precise margin requirements may vary on the basis of the region and type of account.

Best time to trade indices

There are particular periods of time during a trading week where market volumes and prices could go out of control as the market takes into consideration all the news and events that could affect the trades. Hence, for expert traders the time between 9:30am to 10:30am ET is considered to be one of the most fruitful ones as it brings some of the best opportunities. You may want to take into account the various indices that are traded during different times on the basis of individual exchange. However, if you are an amateur player, you should try to avoid these trading hours. 

Since they are not open 24 hours a day like a forex dubai, you need to discover the right time for yourself to open a position on the indices market.

What moves an index’s price?

There are a number of factors that can affect index prices such as: 
 

• Economic news –   Underlying volatility can be affected by investor sentiment, central bank announcements, payroll reports, or other economic events. As a result, an index’s price can move significantly. 
• Company financial results –  Profit and loss of individual firms can cause share prices to go up or down, which can affect an index’s price
• Company announcements – If there's an announcement about a change in a company’s leadership or talks about possible mergers are doing rounds, then the share prices may be positively or negatively affected. 
• Changes to an index’s composition –  When more companies are added or removed from weighted indices the change in prices is noticeable since traders have to adjust their positions to accommodate the new composition.
• Commodity prices – A number of commodities affect the prices of different indices. For instance, 15% of the shares listed on the FTSE 100 are commodity stocks. This implies that if there is any movement in the commodity market, there will be a direct impact on the index’s price

Why trade indices?

1. Go long or short

It is possible to take both long and short positions with index trading CFDs. You much profit you make or what kind of loss you incur is determined by how accurate your speculation is and what is the size of the market movement.
 

1. Trade with leverage

CFDs are leveraged products. This implies that you need to simply deposit a nominal margin amount as an initial deposit to be able to open a position that gives you much larger market exposure. Use caution in leveraging trading as the profit or loss you make is calculated on the basis of the entire amount and not just on the size of your deposit. 
 

1. Hedge your existing positions

An investor who has a number of different shares may want to short an index to cut down losses on their portfolio. If the market topples and share prices start falling, the short position on the index will increase in value. This will offset stock losses. But if the overall stock value has increased the short index position would also offset a part of the profits that you earned. See YouTube for more information..