How to trade with indices trading products?

Have you ever thought about the market index and why it means so much to investors? Well, Indices are baskets of assets that show how different parts of the financial universe are performing. There are various indices trading products that include stocks, forex, bonds, and commodities. Each index is composed of assets and the index reflects the fluctuating values of the constituents within it.

By tracking the performance of a large group of assets, an index aims to reflect the state of a broad industry sector or a country’s trading market as whole. Although indices are mostly used while stocks trading but generally there are seven types of indices :-

Global

Regional 

National exchange 

Industry

Currency

Sentiment based

The world’s major financial markets each have at least one financial index. For example, the S&P 500(US500) is an index of the 500 largest companies in the US , the  US dollar index and the EURO index are the two indices that track the performance of EURO and the USD in the foreign exchange market.

What are the benefits of index trading?

• Many individual investors opt to trade indices in their investing accounts particularly if they are saving for future.
• Index trading gives investors exposure to a range of companies.
• Index values fluctuate each trading session but they do not lose or gain huge amounts unless there’s major change like a market crash ,geopolitical event or natural disaster.
• Indices pose a lower risk than investing in individual stocks.

How to trade indices?

Trading stock market indices is a way for individual investors to gain exposure to the regional or global markets without having to spend time analyzing the financial statement of numerous individual companies. Popular stock market indices offer investors high levels of liquidity and tight bid and ask spreads for buying and selling thus making it easier to enter and exit positions.

Investors can trade indices via investment funds that manage the process on their behalf.

Passive funds, also known as tracker funds, hold stocks in the same proportion as the index to match its performance.

Active funds are managed by fund managers, who aim to outperform the index.

Investment products, such as mutual funds, collect dividends paid on the company stocks in the index. Fund managers charge an annual fee as a percentage of the fund’s value.

When an index is rising, it is said to be in a bull market. During such times, opening a long (buy) position on the index allows traders to potentially profit from the rise without having to buy, trade or research individual stocks. Similarly, when an index falls 20% or more, it’s said to be in a bear market and traders can potentially attempt to profit by going short(sell) in a downward trending market.

Indices trading with ETF’s(Exchange traded funds):-

To many of the new traders ETF is a very unheard term. However Exchange-traded funds (ETFs) are an increasingly popular way for investors to trade index funds. ETF fund managers, such as Xtreamforex , charge relatively lower fees, so investors keep more of their returns. As they are traded on exchanges, the price of an ETF fluctuates throughout the trading session, unlike a mutual fund for which the price is settled once daily. ETFs can be bought and sold quickly and easily through trading platforms .

In addition to index funds, there are several derivative products based on indices that investors can trade to try and maximize returns. These include options or futures contracts that investors can use to hedge against fluctuations in the level of the indices, or speculate on whether they will rise or fall over a short period of time.

Indices trading with CFD(Contract for difference):-

Another popular way to trade global indices is with contracts for difference (CFDs) on online trading platforms.

A contract for difference (CFD) is a type of contract between a broker and a trader, where one party agrees to pay the other the difference in the value of an asset or security. The trader aims to make a profit from the difference between the price of the asset when they open and close the trade.

Using CFDs to trade indices allows you to try to capitalize on market fluctuations in both directions.

In contrast, if you buy an index fund directly, you only make a profit if the value rises.

Indices are often useful for longer-term investors that aim to diversify their portfolio​. Since a wide range of stocks or other assets can be purchased with a single transaction with the help of brokers like Xtreamforex rather than using an exchange or mutual fund provider , which has made indices trading a very popular form of trading these days.