Indices

Indices

What is CFD trading on indices?

CFD trading is a popular form of financial trading because it allows investors to profit from rising or falling markets.  When you place a CFD trade on a particular index, you are speculating on the overall performance of the equity market that the index represents, rather than focusing on individual stocks and shares.  Therefore, you can take a more general view of a market and you will be able to make money from upward or downward movements, depending on which way you trade.

CFD trading on indices is a relatively simple concept in that your exposure per point of movement on the index in question will generally be one of the currency of the index.  Online CFD services, such as those provided by ADS securities, make it possible to speculate on markets around the world.

Global Indices at a Glance

A stock index is comprised of the largest publicly traded companies based in a given country. So, if you are Trading CFDs on the UK 100, you will be speculating on the prices of UK-based companies.  Indices are heavily traded around the world and, due to the large number of firms that make up each individual index, it is difficult for one participant to overly influence the index’s performance.

One of the main factors that will affect the performance of any given index is the national economy, as this underpins the growth of the firms that are listed on the index.

Trading on indices is leveraged, which means you could build up profits or losses far greater than your initial investment. The potential for high returns may be attractive, but never forget that losses can mount up just as quickly if the market moves against you.

Cash Index & Futures Index CFD examples

When you open a CFD you can choose to either go “long” or “short” depending on whether you expect the price of the instrument to rise or fall.

A ‘LONG’ TRADE – YOU EXPECT THE PRICE TO RISE

UK100 Cash Index is trading at 5330 – 5331.

You think that the outlook for the UK economy is good and the share index will rise so you decide to place an order to buy 5 CFDs at 5331. This means that for every point the price of UK100 moves, you will make a profit or loss of £5.

Scenario A

Your prediction was right and the price of the UK100 Cash Index rises to 5350-5351. You close your position at 5350. The difference between your buy price 5331 and your sell price of 5350 is 19 points, therefore you make a profit of £95 (19 x your 5 CFDs trade size).

Scenario B

Your prediction was wrong and the price of the UK100 Cash Index falls to 5310-5311. You close your position at 5310. The difference between your buy price 5331 and your sell price of 5310 is 21 points, therefore you make a loss of £105 (21 x your 5 CFDs trade size).

SCENARIO OPENING PRICE CLOSING PRICE DIFFERENCE TRADE SIZE P&L
A 5331 5350 +19 5 CFDs +£95
B 5331 5310 -21 5 CFDs -£105

A ‘SHORT’ TRADE – YOU EXPECT THE PRICE TO FALL

The US500 Cash Index is trading at 15402 – 15406

You think that the outlook for the US economy is poor and the share index will fall so you decide to place a trade selling 10 CFDs at 15402. This means that for every point the price of the US500 Cash Index moves, you enter a profit or loss of $10.

Scenario A

Your prediction was right and the price of the US500 Cash Index falls to 15276-15280. You close your position at 15280. The difference between your sell price 15402 and your buy price of 15280 is 122 points, therefore, you make a profit of $1220 (122 x your 10 CFDs trade size).

Scenario B

Your prediction was wrong and the price of the US500 Cash Index rises to 15444-15448. You close your position at 15448. The difference between your sell price of 15402 and your buy price of 15448 is 46 points, therefore, you make a loss of $460 (46 x your 10 CFDs trade size).

SCENARIO OPENING PRICE CLOSING PRICE DIFFERENCE TRADE SIZE P&L
A 15402 15280 -122 $10 +$1220
B 15402 15448 +46 $10 -$460

 

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