Indices and How to Trade Them

What are Indices?

In finance, an index refers to a hypothetical portfolio of securities, which is representative of a market or segment of a market. Indices often form benchmarks for the markets in which they are located, as in the case of S&P 500.

The S&P 500 is a commonly used benchmark for the performance of the US stock market because it comprises 500 large market capitalisation (better known as "blue chip") companies and is seen as a leading indicator of the performance of US equities. Numerous exchange-traded funds (ETFs) track indices such as the S&P 500.

Why trade CFDs on Indices?

Indices simplify the investment process. Even if you are familiar with investing in US stocks, investing in stocks in other countries or economic unions (such as the European Union) presents a different and less familiar set of variables, which means more uncertainty and thus more risk.

If you want to invest in a particular country but are not sure which stocks to select, you can choose to trade a fund that tracks an index that corresponds with that country (indices cannot be directly invested in).

How are indices calculated?

Indices are typically constructed from a basket of assets and given a base value. The index then tracks the prices of the assets (for example, US stocks) as they change. The base value and how much the index changes in response to price changes depends on the index's composition and calculation methodology. A stock index, for example, measures the price performance of a group of shares on an exchange. The values are influenced in two ways, in general.

Most global stock indices are capitalisation-weighted, meaning that the companies with higher market capitalisation have a greater impact on the index's value. Some indices, on the other hand, are price-weighted. This means that companies with higher share prices have greater impact on the index's value.

One type of index that may fall in either category is a Composite Index. Composite indices statistically measure market performance of a given sector or market over time and are useful for measuring portfolio performance. These may be weighted by either market capitalisation or price.

Index compositions may change from time to time, and how the value is computed will depend on the weightage that the calculator assigns to each company that is part of the index. When trading indices, consider which companies the index includes, why they were selected or excluded, the sectors covered by the index, and the regularity of rebalancing activity.

“If you want to invest in a particular country but are not sure which stocks to select, you can choose to trade a fund that tracks an index that corresponds with that country.”

How does trading CFDs on Indices work?

After indices are established, funds are constructed to emulate the indices, and these funds are in turn offered on exchanges where investors can buy into them.

It is also important to note that the value of the index may have less meaning than the relative change in the index day to day. For example, if you were to buy into a Contract for Difference ("CFD") offered by Plus500 on the Germany 30 Index Futures, you would expect the CFD's price movements to track those of the DAX30.

However, comparing the number of points moved does not present any meaningful measure. The relative change versus the index's total value (expressed as a percentage), on the other hand, allows you to quickly understand how recent movements affect your investment.

Trade CFDs on the Germany 30 Stock Index ("DAX30")

Comprising 30 of the largest German companies by book value and market capitalisation, the DAX30 is a popular index that sees high volatility, providing more opportunities for trading.

Be sure to trade CFDs with a licensed broker such as Plus500, which offers trading CFDs on the DAX30 Index Futures This may be more suitable for investors and traders who have less time for trading due to other commitments, but please note trading CFDs is risky and need to be taken seriously as your capital is at risk.

Trade or Invest?

Ultimately, the choice depends on your trading strategy and personal preferences.

If you want to enter and exit trades more rapidly, consider funds that track more volatile indices.

If you prefer a more cautious approach, you can select an index and the corresponding fund with lower volatility, and which more accurately reflects the health of the economy as a whole, such as the S&P500.

For more information, please visit https://www.plus500.com.sg.

Note: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.

 

About Plus500

Plus500 is a leading provider of Contracts for Difference (CFDs), delivering trading facilities on shares, forex, commodities, ETFs, options and indices, alongside innovative trading technology. Plus500SG Pte Ltd (UEN 201422211Z) holds a capital markets services license from the Monetary Authority of Singapore for dealing in securities and leveraged foreign exchange trading (License No. CMS100648-1) and a Commodity Broker's License (License No. PLUS/CBL/2018) from Enterprise Singapore. The company currently offers a portfolio of over 2,000 instruments. Plus500SG Pte Ltd is a subsidiary of Plus500 Ltd, a company listed on the AIM section of the London Stock Exchange (LSE).

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