What is indices trading? A complete guide

Trading indices is a common way to gain access to the stock market without directly trading individual shares or their price movements. Learn all about the potential benefits and risks of indices trading, and why Capital.com is the right place for it.

What are indices?

Indices are groups of exchange-listed stocks compiled to give insight into the performance of companies, wider sectors, and economies in general. The price of indices will rise and fall depending on the performance of the constituent stocks included on each index. Those that trade indices can gain exposure to a wide range of stocks, rather than just one or two. Consequently, indices trading is often seen as a way of diversifying a portfolio. 

When it comes to how to trade indices, financial derivatives such as CFDs give leveraged exposure to the price movements of the underlying market, such as the US 500 (S&P 500), US 30 (US Wall Street 30) or the Japan 225 (Nikkei 225). It’s these movements that traders attempt to profit on when taking a position. 

Why are indices important?

Indices are important because they act as indicators for key factors such as stock-market confidence, business confidence, the health of the wider economy, and the health of shares investments. When learning how to trade indices, it’s important to understand how these factors can both influence and be influenced by the movement of a given index.

Market analysts will often cite the impact fundamental events such as interest-rate decisions or GDP releases had or are expected to have on the price of certain indices. When trading indices, you should consider following such macroeconomic developments and inform your indices trading decisions by studying the economic calendar for the latest market-moving events.

Trading indices with leverage

Trading indices with CFDs enables you to trade with leverage, meaning you can control large positions with a relatively small amount of capital (known as margin). However, leverage can also amplify losses, so it's important to use it with caution and have a solid risk-management plan in place. 

Major indices on Capital.com have a margin of 0.5%, meaning you only have to put down 0.5% of the total value of the trade, while being exposed to the price movements of the full position. The remaining 99.5% of the value of the trade is effectively advanced to you by us.

Let’s say you’re trading one US Tech 100 CFD contract at a price of 18,000. The total value of the trade is $18,000, but you’ll only have to put down $90 (0.5%) as margin. If the price increases by 30 points to 18,030, you'll earn the full $30 profit. Similarly, if the price fell by 30 points to 17,970, you'll incur the full $30 loss. 

Overall, how to trade indices with leverage will depend on your strategy, risk tolerance and market conditions, so ensure you have a comprehensive trading plan in place that explores each of these crucial factors.

Why traders trade indices

Traders may choose to speculate on indices for a number of reasons, ranging from diversification to liquidity to pure speculation. Here are a few of the more common ones. 

Speculation

You may trade an index purely to speculate on the direction of the overall market. This can be done using technical or fundamental analysis to make predictions about market movements and trade indices accordingly.

Diversification

Indices represent a broad range of stocks or assets from a particular market or sector. Trading indices allows you to diversify your portfolio and reduce individual stock risk. Instead of trading individual stocks, you can gain exposure to the overall market.

Liquidity

Major indices like the US 500, US 30, and the Japan 225 are highly liquid, meaning there is a high volume of trading activity. This liquidity makes it easier to enter and exit positions at desired prices.

Access to global markets

You can gain exposure to international markets by trading global indices. For example, you can trade the Japan 225 to access Japanese equities or the US 500 for exposure to US stocks.

Risk management

Trading indices can be a way to manage risk by taking a position in the broader market rather than individual assets. This can help you avoid company-specific risks such as earnings reports or management changes.

Volatility

Some traders are attracted to the volatility of indices, as price fluctuations can provide opportunities for profit, although trading on volatility is a high-risk strategy that could lead to significant losses as well. You might want to employ strategies like day trading or swing trading to potentially capitalise on short-term price movements.

Popular indices to trade

There is a wide range of indices available to trade, which are sometimes calculated by different methodologies. For example, the S&P 500 lists the 500 largest businesses listed on American stock exchanges by market capitalisation, meaning the companies that are the among the largest by such a measure (eg Apple) are closest to the top. 

By this methodology, the most-capitalised companies are also weighted more than companies further down the index, meaning that stock price fluctuations in the highest-placed companies may have an outsized impact on the wider index price. 

Other indices, such as US Wall Street 30 (Dow Jones) are weighted by price, with the higher-priced stocks appearing closer to the top and, again, having a larger impact on the index value. 

From the Germany 40 (DAX 40), to the Japan 225 (Nikkei 225), Japan’s benchmark index, to less commonly-traded indices such as the Switzerland 20 (Swiss Market Index), you’ll find the performance of stocks, industries and economies represented all over the world.

How to trade indices with Capital.com

You might want to hedge a liquid index such as the S&P 500 to try and spread your risk vs other global stocks you’re trading. Or maybe you may have specialist knowledge in a lesser-traded index that you feel gives you an edge when speculating on that market.

Whatever your preferred strategy, you can trade indices with Capital.com by following these steps:

  • 1. Choose an index CFD to trade, based on your trading goals
  • 2. Decide on your trade size
  • 3. Consider applying a stop-loss to manage risk
  • 4. Open your position long or short
  • 5. Manage your position, monitoring fundamental and/or technical drivers
  • 6. Close your position

Costs involved in indices trading

As with all of our markets, when you trade indices with us, you’ll pay a spread, which is based on the difference between the buy price and the sell price of the market. For example, if you’re trading the US 100, our spread is 1.8 points, which you will pay on the opening and closing of the trade. The buy and sell prices look like this:

You may also pay additional fees, for example if you use a guaranteed stop-loss or if you hold a trade overnight. As with all Capital.com instruments, you won’t pay any commission when you trade indices. 

Indices trading examples

It’s advisable always to make sure you’re aware of the cost of trading before you open a position. You can do this via our charges and fees page.

 Indices trading benefits with Capital.com

At Capital.com, we’re proud to have won a range of awards from some of the leading authorities in the trading world. We’re rated Excellent on Trustpilot, and we’re always working to improve the experience of our 500,000+ clients. Here are just a few reasons to choose us for your indices trading.

  • Clear, easily-navigable interface across desktop, app and tablet 
  • Rapid withdrawals*
  • Multiple chart types and 75+ technical analysis tools 
  • Insightful education via courses, videos and webinars, as well as an in-platform, asset-specific Reuters feed
  • Round-the-clock support

So why not join our growing customer base and trade indices with us today.

Get started with indices trading.

*98% of withdrawals are processed within 24 hours, according to our internal server data from 2022.

Frequently asked questions

How do you trade an index?

You can trade an index by taking a position on the price of the underlying market through a derivative such as a CFD. After you’ve opened a brokerage account, you'll decide what index to trade. Then, you decide how much you want to stake, in relation to contract size for CFDs. Next, you might want to add any risk-management measures such as stop-losses. You’ll decide whether to go long or short, and monitor your position. Finally, you’ll close your position when the price hits a certain level.

How do you make money with index trading?

With index trading, you’ll make money if the market moves in your favour. If you speculated on the market rising (called going long) you’ll profit if the price goes up. If you speculated on the market falling (called going short), you’ll profit if the price goes down. Profit or loss can be impacted by any additional broker fees, so always check what your costs are before trading.

Is it better to trade stocks or indices?

The choice between trading stocks or indices is down to you, but overall, trading indices allows you to diversify your portfolio and reduce individual stock risk. If a particular stock drops in price, for example, the effects of that fall may be mitigated by your exposure to the wider index. On the other hand, if you have specialist knowledge in a niche sector, choosing a small selection of individual stocks may be more appropriate for your trading style and risk tolerance.

What are the top three market indices?

Among the most-traded indices globally are the US 500, the US Tech 100, and the US Wall Street 30, which feature some of the most highly-capitalised stocks in the world. The indices are also some of the strongest performing, with the US Wall Street 30 average return from 2013-2022 standing at 10.47%, the US 500 at around 12.39% and the US Tech 100 at 13.6%.* 

*Source: Macrotrends


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