In financial markets, an ‘index’ refers to an indicator of the overall change in the values of some, or all of the securities listed on a particular market. These securities, which can include shares or other financial instruments, are typically grouped together based on a specific criteria such as industry sector or geographic location. The index tracks the aggregate changes in the prices of these securities, offering a snapshot of the market’s, or even sector’s overall health.
Globally, there are numerous indices designed to monitor distinct groups of assets. The US 500 and Germany 40 are examples of major stock market indices. However, the scope of indices extends beyond shares, capturing a range of assets including bonds, real estate, and market volatility. Indices can be categorised by anything from geographical location, to the market capitalisation of the components they comprise or the specific sector of market activity they represent.
Factors influencing index prices can be anything from economic updates to corporate earnings and declarations, geopolitical developments, fluctuations in currency values, commodity price shifts, investor sentiment, or adjustments in the compositions of the indices themselves. Regulatory changes and market speculation can also play significant roles in shaping the performance of indices.
Trading on an index involves taking a position on the upward or downward price movements of a market like the US Tech 100 or UK 100. This can be done using a financial derivative product like a CFD.
CFDs give you the ability to trade on an index’s price using leverage, which means that you can take a potentially large position for a comparatively small outlay. That said, leverage can result in large, fast losses and gains, so it’s important to understand their complexities and risks before trading. Take a look at our CFD trading guide to get started.
This method of index trading can give you widespread market exposure without the need to directly hold individual company shares, commodities, or currencies. It can also help you to diversify your market activity and manage risks more effectively. But as with any type of trading, index trading presents a risk to your capital.