Index trading and investing has grown in popularity over the past 20 years because trading indices enables you to get exposure to an entire economy or sector with one single position, instead of opening multiple trades across several companies. Here are some more reasons to trade indices:
- Diversification: rather than relying on a single stock, an index gives you exposure to a broad section of the market at once.
- Lower volatility: indices are usually less volatile than other asset classes, with their price movements balanced by the number of companies they track.
- Accessibility: rather than performing fundamental analysis on a niche stock to see if it’s undervalued, indices are a broader reflection of the overall economy.
As well as indices growing in popularity, there are also several reasons to trade the stock market using CFDs.
- Go long or short: with CFD index trading, you have two options when opening a position: going long or short. Going long means you’re buying the market in the belief that it will rise. Going short means you’re selling that market in the belief it will fall, so you can profit from falling prices as well as rising ones.
- CFDs are leveraged: this means you only need to commit a smaller initial deposit – also known as margin – to open a position that gives you the same level of exposure if you were to invest in the stock market directly. Bear in mind that while this magnifies any profits, it also magnifies losses – so it’s important to manage your money and your positions carefully and sensibly.
- Hedging your existing portfolio: if you’re an investor who owns various physical shares, you might short an index to protect yourself from losses in your portfolio. If a stock market loses value, your short position with the index CFD will increase in value – cancelling out the losses from the stocks. However, it’s important to note that if a stock market gains in value, your short index position would cancel out the proportion of profits made with your physical shares.
What moves an index?
A stock index’s price is determined by the movements of the shares it tracks. Here are a few factors to watch out for when deciding what might move stock markets:
- The political climate: politics can have a significant impact on stocks. Elections can mean a change of policy that could bring headwinds or tailwinds for business, international tension could bring tariffs and more.
- Company announcements: a new CEO, merger or earnings release at a key stock will often play out on the index it tracks.
- Economic data: employment data, central bank announcements and inflation rates all offer clues to how an economy is performing – and demand for shares in strong economies is often higher.
- Industry news: if a headline impacts several large companies in a sector – e.g. mining or banking – then expect it to impact their broader index too.