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How to Trade Indices

Indices: How They Are Traded

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Indices: How They Are Traded

Indices: How They Are Traded

Index trading involves attempting to gauge whether the value of an index is likely to increase or decrease, instead of the trader actually buying any shares.


A trader can initiate a Spread Bet or CFD on an index just as they would on a stock, currency or commodity. To try and make a profit, a trader will ‘buy’ an index, aiming to ‘sell’ it at a later date for a larger amount than bought for. Traders also consider selling indices at the start of a trade, with the intention of buying them back for a smaller sum in the future.



In its most popular format, an index is a portfolio of shares representing a market or market sector. Each share that is listed on an index contributes towards the calculation of the index’s value. Because the value of an index is a weighted average of all the shares it is comprised of, its movement depends on the performance of its component companies.


Share values are very much driven by the law of supply and demand. When investors see a company performing well, for example, in anticipation of higher earnings from the firm, more investors will want to buy shares in that company. If more investors want to buy rather than sell a company’s shares, that company’s share price will increase. On the other hand, if more investors are interested in a selling than buying, the share price would drop.


This means that a rise in share price does not necessarily reflect a company having increased its profits, but more so that it is being perceived as high-performing by investors. So, if the FTSE 100 is ‘up’, more investors are buying the various stocks on the index than selling them and share prices have increased. If more shares of the component companies are being sold than bought, the index declines.

The Differences Between Trading on Indices and Trading on Equities

The Differences Between Trading on Indices and Trading on Equities

The Differences Between Trading on Indices and Trading on Equities

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While a share’s price can be a useful indicator of a single company’s performance, indices can provide useful generalisations of the current conditions of a whole market or specific market sectors.


When trading stocks, news regarding new product leaks, defects and recalls, as well as competitor announcements, company earnings and mergers and acquisitions, can shift share prices quickly and dramatically. When trading an index, although traders are still exposed to these risks, it is at a much lower level since they are effectively trading multiple companies together.

The Volatility of Indices

Volatility_Ahead_optThe Volatility of Indices

The Volatility of Indices

The constant movement of the different stocks that an index is made up of can make it a relatively volatile market to trade. However, it is rare for all the component shares to experience large shifts in the same direction at once – indices generally don’t move by more than around two points each day. However, this does not hold true in the case of stock market crashes or slumps. In the ‘Black Monday’ of 1987, the Dow Jones fell by more than 20% in one day. In a more recent example, the Shanghai Composite prolonged slump in mid-2015 saw the Index fall significantly – well over 2% - for days on end.

Indices Trading Example

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Indices Trading Example

Indices Trading Example

In the following scenario, if the FTSE 100 index stands at 7050, ETX Capital may offer a spread of 7049/7051. 7049 is the ‘bid’ price – the price at which one can sell the index, whereas 7051 is the offer price – the price at which a trader can buy the index. Traders can then choose the amount of money they would like to trade per point of market movement.


If a trader predicts the FTSE 100 value to increase, they might go and buy it for £10 per point at 7051. This means that, for every point the FTSE 100 increases by, the trader earns £10. However, since the ‘sell’ level is 7049, the trader initiates the trade £20 down (£10 x 2 points), as if they were to exit the trade immediately, this is the loss that they would incur. If the trade is kept open until the trading day’s close and the FTSE 100 rises to 7061/7063 , the trader’s profit will be £100 (7061-7051 = 10 point increase, and 10 x £10 = £100).

Do note that two points of movement in this trader’s favoured direction would be needed for them to break even. Only the subsequent points of market movement in the trader’s favour would make for a profitable trade.


If the FTSE 100 had decreased by the end of the trading day instead, falling to 7039/7041, the trader would make a loss of £120 if they close at this point, as they would be selling the FTSE 100 at 12 points lower than the price that they bought for (£10 x 12 point decline).


With ETX Capital you can trade on major financial indices, such as the UK 100 (FTSE 100), Wall Street (Dow Jones), and Germany 30 (DAX). Apply for a free trial account, learn to trade or start live-trading with one of our platforms today.

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