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What are indices ?
Indices
An index is a grouping of financial assets that are used to give a performance indicator of a particular sector. The plural term is indices.
As indices are only indicators of the collective movements of a group of assets, they have no physical value. For this reason, indices are measured and move in points, rather than in currency. They are used to track the performance of the underlying assets, providing a benchmark for investors and traders to assess the overall health and direction of a specific market or economy.
This also means that indices traders are unable to trade any index directly and instead have to do so through derivative products like spread bets, CFDs, futures or ETFs. These products allow traders to speculate on the movements of indices without buying every single asset within the index.
Several asset classes can have indices, although the best known are stock indices and commodity indices. Every index has its own means of calculating value.
Indices are constructed using a weighted average of the prices of the constituent assets, typically using market capitalisation weighting or price weighting. Market capitalisation weighting considers the total market value of each company, while price weighting assigns equal weight to each constituent regardless of market capitalisation. You need to be aware of the construction of the index you are going to trade, as this will provide insight to the constituents and how they move.
Stock index / Stock indices
A stock index is a group of shares that are used to give an indication of a sector, exchange or economy. Usually, a stock index is made up of a set number of the top shares from a given exchange.
What indices to trade ?
The choice of which indices to trade depends on your trading strategies, risk appetite, and investment goals. Here are some of the most popular indices to consider.
Indices to trade include:
S&P 500: This index tracks the performance of the top 500 publicly traded companies in the US and is widely regarded as a barometer of the US economy.
Dow Jones Industrial Average (DJIA): The DJIA tracks the performance of 30 large-cap US stocks, including blue-chip companies like Coca-Cola, Goldman Sachs, and Boeing.
NASDAQ Composite: This index comprises over 3,000 companies, mostly technology-focused, and is often used as a benchmark for the tech industry.
FTSE 100: The FTSE 100 tracks the performance of the top 100 companies listed on the London Stock Exchange, making it a popular choice for traders interested in the UK market. There is also the FTSE 250 which tracks the performance of the top 250 companies listed on the London Stock Exchange.
Nikkei 225: This index tracks the performance of 225 large-cap Japanese stocks and is often used as a barometer of the Japanese economy.
DAX 30: This index tracks the performance of the top 30 companies listed on the Frankfurt Stock Exchange and is a popular choice for traders interested in the German market.
Hang Seng: This index tracks the performance of the top 50 companies listed on the Hong Kong Stock Exchange, making it a popular choice for traders interested in the Asia-Pacific region.
To trade a stock index, traders have to either use a tracking fund or a derivative like a spread bet, CFD, future or ETF. These products all offer different methods of trading on the price movements of stock indices without having to buy multiple stocks at once.
What moves the price of an index ?
An index’s value changes as the prices of its constituent shares fluctuate, so it will mirror any general upward or downward trend in the stocks.
The factors that move indices are therefore essentially the same as those that influence individual shares. The difference is that an event affecting just a single company will generally have only a minor impact on the value of any index that includes the stock.
However, economic or political events relevant to a group of companies or a business sector, such as mining companies, technology firms or banks, can have a significant effect on an index that contains these shares. As the balance of supply and demand for the stocks
shifts, the collective change in share prices can cause a move of multiple points in the index.
And of course, when an event has implications for an entire country or region’s businesses, or even the outlook for the global economy as a whole, its impact on stock indices can be dramatic.
Influential events
You can expect movement in the value of an index when the following events occur in a related country or business area:
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Economic data releases
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Central bank announcements
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Geopolitical events and wars
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Natural disasters
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Government policy, legal and regulatory updates
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Corporate news – good or bad
All of these can affect investors’ confidence in the prospects of companies to grow and generate profit, which in turn directly shapes market sentiment.
Market sentiment
The collective mindset of traders and investors affects the movement of all indices. Major or unexpected events in particular can sometimes cause a surge in bullish or bearish sentiment, leading to pressure from buyers or sellers that forces share prices – and so index values – up or down. A correction is often seen later, as traders calm down and equilibrium is restored.
Why trading indices with Guardian ?
Dedicated relationship manager
Highly experienced and qualified, and on hand to assist you as much or as little as you need.
Free live prices and trading signals
Trading ideas generated using in depth technical analysis, including entry, limit and stop levels.
Tax efficient
Trade on a spread bet and pay no capital gains tax on profits.
Breaking indices news
Market moving macro-economic news delivered to your inbox
Trade major global indices
Over 80 indices including US, Europe and Asia.
Trade indices 24 hours a day
Including Wall Street, FTSE 100 and the Germany 30.
What are the costs to trade indices ?
Spreads
This is the cost to trade. The spread is the difference between the buy and sell price. The spread is effectively a commission charged for executing the trade. The spreads we can offer are among the lowest in the industry. You may also be charged overnight funding on some positions.
Margin
Indices are a margined product. This means that you are only required to pay a deposit to control a much larger amount.
This will magnify profits and losses.
How to trade indices
Whenever you Spread bet or CFD indices, you're presented with two numbers: the buy price and the sell price.
So if you wanted to bet on the price of a stock index like the FTSE 100, for example, you might see prices like this on your spread betting platform:
If you thought the value of the FTSE was likely to rise, you could 'buy' at the higher price -also known as the offer price - of 6500.5.
If you expected the FTSE to fall, you could 'sell' at the lower price - known as the bid price - of 6499.5.
The gap between these two prices is called the spread, and this is what gives spread betting its name.
What is the spread?
Neither the buy price nor the sell price represents the exact value of the financial asset you're betting on (also known as the underlying asset). Instead, the buy price is slightly higher than this value, and the sell price is slightly lower.
In the above example, the real-world value of the FTSE would be halfway between the two prices, at 6500. The difference between the buy and sell prices is just 1.0 in this instance, which is a spread of one point.
How does the spread affect me?
The spread is essentially a fee that your spread betting provider charges to place your bet, and the narrower the spread, the better it is for you. Let's look at why.
To close a bet, you need to take the opposite action to when you opened it. So if you open a bet by 'buying', you close by 'selling' and vice versa.
In our FTSE example above, if you 'buy' at 6500.5, you'll need to 'sell' at the same price or higher when you close the bet, or you'll make a loss. This means the underlying FTSE price will have to rise by one point before you break even.
So the size of the spread determines how far the market will have to move for your bet to become profitable.
Bet sizes
When you spread bet, you stake a certain amount of money on each point of movement in an asset's price.
CFD indices trading v Spread betting indices trading
CFD trading closely resembles spread betting. However, although these two derivatives products are very similar in many ways, there are some key differences to be aware of.
Deal size
When spread betting, you bet an amount of money per point on whether a market will go up or down. For instance, you might bet £5 per point that the price of the FTSE 100 will fall. With CFDs you buy and sell contracts that represent a specified amount in the underlying market. For example one standard FTSE 100 contract might be worth £10 per point.
Capital gains tax
Spread betting profits are currently free from capital gains tax, but CFDs are liable because they are classed as a financial instrument. This may seem a major drawback, but any losses can be offset against future profits for tax purposes. Note that stamp duty on share trades doesn't apply to either spread betting or CFDs, as you never own the underlying shares in either case. (Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.)
Expiry times
Spread bets tend to have fixed time limits - anything from minutes to several years - when they'll naturally expire if you haven't already closed them. Most CFD trades, on the other hand, will stay open indefinitely (although there are a few exceptions, such as futures and forwards). When you want to close out a position you simply place a trade in the opposite direction to which you opened it.
Dividends
How do dividend adjustments affect my spread betting or CFD position in an Index?
Constituent stocks of an index will periodically pay dividends to shareholders. When they do, this impacts the overall value of the index causing it to drop by a certain amount.
It’s important to remember that leveraged index traders can neither profit nor lose from these price movements, as they’re scheduled public events. Whilst a long position will receive a payment equivalent to the ex-dividend points paid out, the index will subsequently fall by the equivalent number of ex-dividend points paid out by the index you are trading (see below example). Were a trader able to profit from these movements, they’d simply place a large short position just before the adjustment and close out just after, locking in the drop in the value, but in this event a short position pays out the dividend.
If you have an open position through a dividend adjustment, we’ll ensure that there is no material impact on you by either crediting or debiting your ledger with the exact amount you have incurred as additional running loss/profit due to the dividend adjustment.
Let’s look at some examples:
You are long £10 a point of the FTSE 100 DFB at 4:30pm when there is a dividend adjustment that takes 7.8 points off the index. Our FTSE 100 DFB price drops by 7.8 points, so your running profit and loss (P&L) is reduced by 7.8 x £10 = £78. We therefore credit your ledger with £78, to negate this drop in P&L.
Now, let’s say you’re short two standard lots of Wall Street Cash at 9pm when there is a dividend adjustment of 2.9 points. Our Wall Street Cash price drops by 2.9 points, so your running P&L is increased by 2.9 x 2 x $10 = $58. We therefore debit your ledger with $58, to negate this rise in P&L.
Indices trading tools
Charts
We provide intuitive charts, that are clearer, smarter and faster than ever. Compare the same market across multiple time frames with our innovative chart-splitting feature. Split charts up to four times, and apply the layout that best fits your needs. With a clear view of different periods, from tick-by-tick to monthly, you’ll be in the best possible position to recognise – and react to – significant price movements.
Indicators
Spot the latest opportunities and build new trading strategies using our range of popular indicators, including MACD, RSI, Bollinger Bands and more.
Drawings
Highlight key trends, patterns and levels as they occur with our fully customisable annotation tools.
Client Sentiment
The percentage of client accounts with positions in markets that are currently long or short. Calculated to the nearest 1%
You can also see the sentiment of an instrument over the last hour, today, this week and this month.
Market reports
Market Daily / Broker Upgrades & Downgrades / Week Ahead
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