Indices Trading GuideIndices Trading Guide

GUIDE | TRADING BASICS | BEGINNER

A Guide to Stock Indices

Delve into market indices, why trading as CFDs can be beneficial and popular strategies.

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Types of Indices

The types of indices include commodity, stock, and bond indices. Commodity indices consist of baskets of commodities such as raw materials, precious metals, or agricultural products.

Bond indices are composed of various bonds from the bond markets. A bond represents a unit of corporate or government debt. Bond and commodities indices are not currently offered by FXTM.

Synthetic indices are based on simulated markets, more popularly known as baskets. While they behave like a real financial market, their price movements are created from the use of randomly generated numbers via a

secure computer broker. No broker has any control over these numbers, and therefore no influence over the market’s ‘behaviour’. One example of a stock basket is the Social Media Index.

Stock indices are the most popular and actively traded, however, because they consist of a basket of stocks from top companies traded on a particular stock exchange. For instance, the FTSE 100 index (or UK 100) is composed of 100 of the largest firms on the London Stock Exchange.

Indices don't have any intrinsic value, and do not signify a share of ownership in a company.

What is a Mini Index?

A mini index is a collection of assets, just like a regular index. However, a mini index provides a smaller lot size, which therefore means that you need less capital to invest in them. Popular examples of mini-indices include the Mini S&P500 and the Mini Wall Street 30, both of which are available to trade with FXTM. Mini indices are a great way for a new or more cautious trader to invest in major company names, and enables you to diversify your portfolio with less risk to your capital.

Weighting of Indices

Two main methods exist for calculating the index value. They are referred to as index weighting schemes.

Traditional share dealing has existed for centuPrice-weighted Indices

The index price is calculated by taking into account the price per share of each stock in the index. Each stock contributes a fraction to the overall value of the index. Higher priced shares, therefore, have greater weight in price-weighted indices.

Capitalization-weighted Indices

In this scheme, individual items in the index are weighted based on their market capitalization. For instance, if a company has a higher market capitalization (the company’s worth based on its outstanding shares), the value of its shares will contribute more to the index value than more expensive shares from companies with fewer market caps.

FXTM Stock Indices Trading

FXTM is a leading forex broker that provides opportunities for stock indices trading. We have gathered all the popular stock portfolios from the leading stock exchanges. Other advantages of trading on FXTM include:

How to Trade Indices

There are various ways to trade and invest in financial indices. You may invest in exchange-traded funds (ETFs), index futures, or index options. Investors receive dividends from index mutual funds and ETFs.

The challenge of investing in index funds or ETFs for a retail trader is the high minimum investment amount required by some brokers. There are also management fees to be paid.

The quickest way to get started with indices trading is through trading contracts of differences (CFDs), which is what FXTM offers.

You will not own the underlying assets, and there are no dividend payouts. CFDs allow retail traders to speculate on the price movement of indices. Trades take place on the spot index market, which offers a comparable experience to trading forex pairs.

What are the Most Traded Indices?

Traders are drawn to trading indices that have the most trading volume and higher volatility, so they can profit from the price swings. Stock market indices are fundamentally made up of shares from blue-chip companies or firms with the highest market capitalization.

With FXTM, traders can trade stock indices from around the world. They have high volumes and are closely analysed, which means that you can find economic news releases associated with them.

Stock Indices

Stock Baskets

It is also possible to trade stock baskets, which are not your typical stock index but are offered as an index, alongside currency baskets. Currency baskets do not contain any stocks at all, whilst stock baskets do contain a weighted price average of a number of shares based on theme or industry (very much like your traditional Index ETFs).

FXTM currently offers The Social Media Index, The Space Wars Index, The Green Index, Mobile Index and Vegan Index

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FXTM Account Types that offer Stock Indices

To see which FXTM account types offer index trading, have a look through their pricing comparison, and click on the account name for more information on other trading conditions.

*Spreads are floating and they may increase during specific periods of the day depending on the market conditions. They also vary depending on the index you’re trading, so it’s best to always check the contract specifications of the particular index you’re interested in.

FREQUENTLY ASKED QUESTIONS

Trading indices means trading a collection of assets (usually company shares) as a single product. FXTM offers indices trading as CFDs, which allow you to make potential profits by investing small amounts with the advantage of the broker’s leverage to open large positions. CFDs trading is also easier to understand than trading indices as futures or funds. You don't need a separate company or fund manager to make the trades on your behalf.

You can potentially profit from trading indices. The strength of successful long-term traders is not in their ability to make many winning trades. These traders may average winning percentages that range from 50 to 60%. They aim to ensure that they lose less money than they make on profitable trades.

The stock market index is important because stock indices reflect the market performance of the top companies in a stock exchange. Plenty of traders pay attention to it even if they are only trading stocks. Indices can also indicate a country's economic performance.

There are various stock market indices depending on the market you choose. The most popular indices tend to feature securities from the largest companies, such as the DAX, Euro 50, S&P 500, and FTSE 100.

The best way to analyse a stock market index is to incorporate fundamental, sentimental, and technical analysis. Traders should factor in the key economic releases that affect the stock market. Global events such as the COVID-19 pandemic should be considered.

Announcements on key decisions of companies in an index may also have repercussions on the index value. For instance, the 5th Apple stock split (where 1 share was split into 4 shares) impacted the Dow Jones Industrial Average that’s based on price-weighting. The share price of Apple fell from $500 to $125.

FXTM offer a superior indices trading experience. We have many technical analysis tools and indicators available which can help you to generate precise index trading signals.

Our economic calendar will keep you updated with major economic events so you can leverage fundamental analysis. Updates from our market analysis team will also help you uncover trading opportunities.

By taking advantage of our demo trading accounts, you can develop your own indices trading system. Traders also have access to an advanced strategy tester via the MetaTrader 5 platform. It allows you to test the performance of traditional trading robots (Expert Advisors). This helps you pinpoint the actual performance of various index trading systems.

We have also curated additional MT4 forex trading indicators that you can download. Our traders access high-quality educational resources such as webinars presented by industry experts.