What Are Indices & How To Trade Them

People have added indices to their trading strategy, diversifying their approach and expanding into new markets. But what are indices? Read on to learn more.

What are indices in trading?

Indices are the plural of an index, a group of exchange-traded stocks and shares that are brought together to assess and analyse a particular market.

The primary aim of indices is to offer insight into the performance of particular markets and sectors. However, an index is also important in trading. The value of these indices is subject to market forces, and the price can fluctuate over time. This represents an opportunity for traders, and many seek to profit by speculating on these price movements. In fact, indices can be very useful for traders - the index gives them a way to connect with a broad market with just a single position.

If the market moves in the way the trader expected, they will make a return. If it does not, the trader absorbs a loss instead of moving oppositely.

How does index trading work?

Before you begin trading indices, you'll first need to get to grips with the different mechanics of the market. Here’s what you need to know:

Contracts for difference (CFDs)
When you trade an index, you do not need to take ownership of the asset. Instead, you take out a CFD. CFDs are important mechanisms within the index trading environment, as they provide access to the market even though the trader does not actually own any of the stocks and shares they are working with.

Index trading on leverage
Leveraged trades are not permitted in all markets but are allowed in indices trading. So, if you traded on 20:1 leverage, the broker would provide $20 for each $1 you put in. After the broker is paid back and all interest and fees are covered, the remaining profit is yours.

Calculating the value of indices
The index value is derived from the companies covered within the market capitalisation. Using this method, the companies with the largest capitalisation levels influence the index's performance the most. However, not all indices are calculated in this way. Some are calculated according to the price of each share within the index.

How to trade indices

Follow this step-by-step guide and start opening your first positions.

1. Sign up for a trading account

You'll need an account before you can trade indices. It only takes 3 minutes to sign up on our site!

2. Download a trading platform

A trading platform provides all the tools you need to analyse the market and make trades. Get familiar with its features and other tools it provides.

3. View indices on the dashboard

Enable indices on your trading dashboard to follow the price movements and analyse changes.

4. Select the index you want to trade in and open a position

Open a trading position on an index that suits your trading style. Remember to put stop-loss and take-profit tools in place to protect the trade and monitor its movements regularly.

5. Close the index position

Close the position to complete the trade and to absorb losses or take profits.

Get started today - Trade indices with TMGM

Take your first steps into indices trading today with TMGM. It only takes 3 minutes to sign up!

Frequently asked question

For beginners just starting out with index trading, it may be best to look for indices of relatively low volatility. This offers a more manageable access point for traders who are new to the market. Some of the most popular indices include the Dow Jones Industrial Average or DJIA (US 30) and Standard & Poor's 500 (S&P 500), which may be among the best indices to trade for beginners.

It's difficult to say which is better - trading indices vs. forex - as it will depend wholly on your own trading style and risk and volatility appetite.

The process of trading an index is similar to trading stocks and shares. Indices bring together different stocks and shares within a single index, and traders speculate on the rise and fall in the instrument's price.

Forex involves speculation on the relative price movements of currencies in a pair - an entirely different proposition. Forex pairs are generally less volatile than indices.

Both stock and indices are inherently linked. A stock is essentially a share in a company, commodity or asset. These stocks are equal units bought and sold on the stock market as traders speculate on future price movements. Indices are essentially the same, except the values of many different stocks are brought together to create the index.

Traders then speculate on the price movements of this index, predicting whether the index will move up or down in price. As many different stocks are included in a single index, the outliers cancel one another out, so indices trading tends to be less volatile than individual stock trading.

Objectively speaking, yes. Forex trades are among the least volatile forms of trading, although this is subject to market conditions and other factors. This means forex values won't rise and fall as dramatically as other forms of trading, like indices and stocks. Stocks, on the other hand, are more volatile than both indices and forex trading.
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