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When trading indices, investors focus on classes of assets of segments thereof. Indices are defined as statistical measures of change in a securities market or economy. Rather than deliverable assets, indices are imaginary security portfolios representing a market in whole or in part.

Types of indices

Indices fall into six broad brackets, which are:

  • Capitalization indices
  • Fixed income indices
  • Residential property indices
  • Sector indices
  • Strategy indices
  • Volatility indices

Benefits of trading indices

Many traders find it beneficial to trade indices rather than a portfolio of individual stocks. One transaction allows the trader to gain access to the various instruments that make up the index, as opposed to having to invest in each instrument separately. The S&P 500 for example follows the trends of the 500 biggest companies in the United States. Indices move in accordance with overall market trends, rather than single stock movement.

Key features of indices

Trading indices inherently means immediate diversification of risk. Individual stock option risk is replaced by larger market-wide risk, which is based on the index’s structure. In the eyes of many traders, this not only represents a distinct advantage, but also the very best way of bringing real diversification to a trading portfolio.

How to trade indices

Indices work in a similar manner to various other CFD and Spread Bet products. They are comprised of individual stocks and just like stocks can move higher or lower in value. The ideal being to ‘buy’ at a low price and ‘sell’ at a higher price, in order to turn a profit. Both the current value of the index and forecasts with regard to its projected movement are calculated in accordance with each individual stock the index is comprised of.