Why Do You Trade In Indices? A Guide!

An indice is a measure of the price performance of a group of stocks on an exchange. Indices trading allows you to expose the entire economy or sector at once, while only having to open a single position. You can speculate on the rise or fall of indices without owning the underlying asset with CFDs. Indices are a highly liquid market to trade, and with more trading hours than most, you can benefit from longer exposure to potential opportunities. Start trading indices today with the Alpha Trading Hub account. 

How are stock market indices calculated?

Most stock indices are calculated based on the market capitalization of the companies that make up them. This method places more weight on large-cap companies, which means their performance will affect the value of an indices more than small-cap companies. This method gives greater weighting to companies with higher stock prices, which means that changes in their value will have a larger impact on the current price of an index.

3 Important Reasons For Trading In Indices?

Go long or short

When you trade Index with CFDs, you can go long or short. Going long means you are purchasing a market because you expect the price to rise. On the other hand, going short means you are selling a market because you expect the price to go down. With CFDs, your profit or loss is based on the accuracy of your prediction, and the overall size of the market movement.

Trade with leverage

CFDs are leveraged products. This means that you only need to commit a small initial margin - called a margin - to open a position that gives you much greater market access. When trading with leverage, you must remember that your profit or loss is calculated by the total position size, not just the initial margin used to open the position.

Protect your current positions

An investor with a collection of different stocks may sell an index to protect from losses in their portfolio. If the market goes into a recession and the stock starts to lose value, a short position on the index will increase in value, making up for the loss of the stock. However, if the value of the stocks goes up, a short position on the index will offset some of the profits made. Additionally, if you have an existing short position in several individual stocks in an index, you can hedge any price increase with a long position in that index. If the index goes up, your position in the index will make a profit, offsetting some of the losses on your short positions in the stock. 

Why Trading Commodities?

Commodity trading has two main advantages: diversification and hedging against inflation and geopolitical risks. Diversify: Trading Commodities take your portfolio to another asset class and give it the balance it deserves. Diversification is a fundamental principle of investing and helps to reduce risk.