An index is a compilation or basket of stocks which represents a portion of the bigger market. Usually, the biggest leading companies in the industry are included in an index. That way they can accurately represent the market.
For instance, the S&P 500 is a list of the top companies in the US, but not exactly the top 500 as there are other criteria to fulfil other than being on top to be included in the said index. And to form the index, the shares of these companies are used.
To get started, you should know the popular indices and those that you’re curious to trade. Once you’ve decided what index you like, you can pick an instrument to use like the contract for differences (CFD), exchange-traded funds (EFT), or future and options.
After that, you can gradually formulate the strategy you’re going to use. Some of the go-to strategies of index traders are position, swing, day, and trend trading.
Now, if you’re still thinking of trying indices trading, here are some of the benefits before you try!
1. Passively managed
One of the benefits of indices trading is that it’s passively managed, which makes certain fees lower than the actively managed. It means that since you’re not going to buy an index, and just invest in it, it’s not as managed the way traditional stocks are.
Furthermore, having low fees means investors can just use the money for trading instead of paying tons of fees and other expenses. On the other hand, the actively managed fund requires a hands-on approach, and more money is invested.
So as a beginner in trading, if you’re planning to create a great portfolio, you should add indices to your profile once you’ve tried it.
2. Allow investors to reach their goals
As an investor, aside from the fact that you want to learn how to trade efficiently, you also have certain goals.
For instance, if you want to beat the market and you invest more, there’s a high chance that you can achieve your goal. You can trade an index online using a contract for differences (CFD) or exchange-traded funds (EFT). So even if you go all out with investing, it’s not as big as what you’ll invest when trading the traditional way.
Usually, since there’s no fund manager at most times, you can never go wrong with this approach. So if ever you’re going to try indices trading, don’t be afraid to real your goals.
3. Various opportunities
In terms of various opportunities, there are two main trading opportunities under indices trading— buy long or sell short.
As mentioned before, since you can trade indices via contract for differences (CFD), you can have the opportunity to place a position in the short term. It means that once you feel like the market is going down, then you can sell short.
On the other hand, you can also go long and buy a market once you’re expecting the price to rise. However, it’s up to your analysis whether you’re going to win or lose.
When it comes to trading opportunities, index stocks are constantly on the move, so you can trade whenever you want since CFDs don’t require day trading. However, you can still incur additional fees due to overnight trading.
4. Low risks
Since you’ll need a small amount of capital to start indices trading through CFDs, there are low risks that you’ll end up losing a lot of money.
In CFD, you also have a margin call. It’s when you already used your leverage more than the amount you can trade. By then, the broker will give you around two to five days to pay. But if you can’t, your account will be closed.
Fortunately, if you can pay before you get called, you can continue trading just as before. But be careful with your calculations because you might not notice that you’ve reached your limit.
5. Adjusts to economic situations
Many things may affect the movement of the market. Some of these are company news, global news, commodities, and economic situations. But indices trading has features where it can adjust to the unpredictability of the economic situations.
Indices trading can be complicated at first. But once you already have grasped the right strategy and instruments, you can easily handle it well. Don’t forget to share some beginner tips in trading indices by leaving a comment below!
ABOUT THE AUTHOR: Aliana Baraquio is a web content writer at FP MARKETS, a global Financial Technology services Foreign Exchange (Forex) and Contracts for Differences (CFD) broker established in 2005. She also loves reading about interior design and home makeovers.