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Indices feature prominently among traders. They are baskets of similar shares which you can trade as
individual units. Indices are available at centralised exchanges, such as the ASX, the NYSE, the
LSE, or the NASDAQ. As an index trader, you have freedom to choose from a wide variety of indices
options in Australia, Asia, Europe, or America here at Xtrade Australia. You may have heard the
words indexes and indices – they are used interchangeably, and refer to the same category of
As far as performance measures go, indices rank atop the pile. They are excellent barometers of the overall performance of a category, sector, or market of the economy. In any given index, there is a weighting system at play. This means that the constituent components of an index can be more or less important than others. In order to understand how indices trading works, we briefly turn our attention to the factors affecting share prices in a particular index.
Every index is priced according to supply and demand of the constituent components of that index. That means that the performance of individual components, especially the ones with a heavy weighting are important insofar as the overall index is concerned. Consider the FTSE 100 index as a case in point. This index is a broad measure of the UK economy. It assesses the performance of the top 100 companies by market capitalisation in the United Kingdom.
If one of the top 100 companies suddenly performs poorly and drops out, it will be replaced by the company next in line. Therefore, an index can never technically assume a 0 value. By their very nature, indices assess the top performers in an economy. The FTSE 100 index is a great measure of the UK economy, but there are plenty of other indices in Australasia, the Americas, and across Europe which are equally important measures of economic performance.
Chances are, you are well familiar with country-specific stock market indices around the world. The ASX (Australian Securities Exchange) features many popular indices. Let's take a look at some other global indices that you may already know:
NOTE :When you trade CFDs, you are only trading the Contract for Difference, never the underlying financial instrument. If your CFD is linked to a spot price, or a futures contract, expiry dates may apply.
As you already guessed, US financial markets are the biggest by a long margin. The top 10 stock exchanges according to market cap for 2021, include:
By June 2021, the Australian Securities Exchange (ASX) had a market capitalisation of US$1.87
trillion, placing it firmly in the top 20 biggest stock markets.
The indices in these countries all showcase top stocks with high market capitalisations. It comes as no surprise that the majority of trading activity in the world takes place with these top 10 stock markets & indices. While a stock exchange is a centralised location where stocks are traded, a stock index is simply a performance measure of the market.
Xtrade Australia offers widespread coverage of indices from many different countries, including the following:
Now that you understand how to identify an index, and what it comprises, it's time to learn how to
trade indices online at Xtrade Australia. When you trade, you buy or sell a financial instrument
based on your speculative assessment of its future price movement. If you are optimistic about an
index, you are deemed BULLISH. This means that you are likely to BUY the asset in question. If
you're feeling bullish about the Australia 200 index, you go LONG on the index in anticipation of a
future price rise. If your expectations are pessimistic, you are deemed BEARISH. That means you are
likely to SELL the asset in question. In this case, you can SELL the ASX 200 index.
With speculation, you can BUY or SELL indices based on your determination of price movements. Provided that your initial assessment is correct, it is possible to generate favourable returns in rising or falling markets. A caveat is in order here: Indices CFD trading is a high-risk proposition which can result in partial or total loss of capital. Trade with caution.
Currently, some 5000+ US indices are available in the financial markets. There are indices for every conceivable type of group of stocks, with more being added. Any index with heavy investment naturally trades at higher volumes, with greater liquidity. These are also the most important indices in the world, where retail and institutional speculators focus their attention.
As an up-and-coming trader, it's always a good idea to diversify your financial portfolio to include a combination of assets from different categories, including indices. You can gain tremendous insights into the performance of the financial markets by tracking indices. Indices are priced according to cap-weighted averages of constituent components. This may be a bit tricky to understand, but it'll make sense with this explanation:
The NASDAQ stock exchange include some 2500 shares. In that grouping of shares, the cap-weighted components are the following:
Therefore, if you trade the NASDAQ as a broad index, your focus should be on the top five sectors
which are the most heavily capitalised components of the NASDAQ. There's no point basing your
expectations on NASDAQ performance on telecoms, oil and gas, and basis materials, since these
comprise an insignificant chunk of the broader NASDAQ stock exchange.
It's always a good idea to focus your capital and trading smarts on constituent components that are likely to move the index up or down. Don't worry about elements like utilities, telecoms, oil and gas, or basis materials as barometers of the overall performance of the NASDAQ. Your focus should be on technology shares, consumer services, healthcare, financials, industrials, and consumer goods.
Now that we understand the importance of specific sectors within the NASDAQ, let's see precisely how important capitalisation-weighted components really are in the NASDAQ (these share percentages change based on demand and supply considerations):
Viewed in perspective, these 10 companies make up an estimated 50% of the total market capitalisation of the NASDAQ 100 index. As you move down the list, the importance of individual companies diminishes as part of the overall NASDAQ 100 index. This can be extrapolated to the ASX (and others) and their leading indices too.
A CFD is a derivative financial instrument. It stands for contract for difference. The CFD tracks the price movements of the underlying financial instrument, in this case indexes. One of the benefits of CFD trading is that it is possible in rising or falling markets. If you're bullish you buy the CFD. If you're bearish, you sell the CFD. Your profit or loss is determined by the difference between the opening and closing prices of the CFD, based on your initial call. Let's take a look at a basic example to illustrate CFD trading:
If CFD prices move contrary to expectation (and they often do) you will incur a loss this size of
the price movement multiplied by your contract size. These high-risk financial instruments are not
suited to all types of traders. Do your homework before trading CFDs for real money.
NOTE: Daily Premiums are applicable to CFDs held overnight. This means that if you have not closed out your CFD by 10 PM GMT, premiums will be charged to your trading account. Let's take a look at the impact of leverage and margin with CFD indices trading.
Whether you are a new trader or an experienced trader, you are still working with a limited budget. Leverage allows you to maximise the trading power of your budget by multiple. It varies from asset category to asset category. With CFD indices at Xtrade Australia, you can employ leverage on CFD indices trading. Leverage amounts are offered as follows:
Remember:The higher the leverage and the lower the margin requirements, the riskier
the potential outcomes. You will be liable for the full value of the trade if it moves against you,
not simply the margin requirement to open the trade.
Risk Disclaimer:CFD trading is inherently risky, and not suitable for all types of traders
Caveat :It is important to understand that traders are liable for the full value of the trade, not simply the margin requirement.
If you have invested in stocks listed in the ASX, or the NASDAQ 100, you understand that a fall in
stock prices will adversely affect your portfolio value. Fortunately, you can mitigate against
downside price movements by way of CFD indices. CFDs are powerful hedging tools which you can use to
safeguard your physical shares in your portfolio. For example, you can short CFD indices, thereby
capitalising of downside price movements and protecting the overall value of your portfolio.
Xtrade Australia features many unique tools and resources designed to help you trade more effectively. These include limit orders and stop orders. They can automatically close positions if the market moves unfavourably. Do your homework with technical and fundamental analysis. Understand how trend lines, moving averages, support and resistance levels, and price trends can help you make informed trading decisions. Even with the most comprehensive analysis, markets remain highly unpredictable. Use caution at all times.
Demo trading accounts are a great way to understand how markets function. There are many reasons why indices may rise or fall in value. These include geopolitical elements, natural disasters, and macroeconomic factors. Overall though, indices are less risky than individual stocks, because you investing or trading a basket of stocks. Indices are calculated into ways. One is a price-weighted index (shares with high prices feature prominently) and the other is a value -weighted index where the total number of shares x price gauges the importance of that company in the index.
Xtrade Australia’s trading platforms and educational resources are designed to help you make smarter trading decisions. Now that you know exactly how indices work, you can buy or sell indices CFDs using Xtrade Web Trader on your PC, Mac, or mobile.You can also download our complimentary mobile trading apps for an enhanced experience. Diversified your financial portfolio and hedge against risk with CFD indices trading.
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