Frequently asked questions
How to start indices trading?
The most popular way to start trading indices. Find out the best index funds to invest in. This financial instrument allows traders to profit from the difference between the opening and the closing price of an underlying asset – in this case, an index. You can trade indices in both directions, just as if you trade currency pairs. You can potentially profit from both rising and falling prices.
To trade stock indices effectively, you first need to understand what their price depends on. It is generally driven by the news (e.g., earning reports), political issues, and global economic situation. It is also worth using technical analysis.
What are the risks of indices trading?
Indices trading is considered a relatively secure form of trading, especially for a long-term investment, as you are spreading your risk across an entire segment of stocks as opposed to a single stock.
However, some volatility risk still remains. Stock indices can go up or down for a variety of reasons. But unfavorable price moves can lead to losses, especially if you cannot react to a price change immediately.
Collecting news and analysis will help you to make better decisions. It is also a good idea to use risk-management tools. Choosing tools such as Stop Losses, Limit Orders, and Trailing Stops will help you to protect yourself from volatility.
What is indices trading?
Indices, or indexes, measure the price changes of a particular group of stocks over time. They allow trading the value of many companies as a single product. Stock market indices are also used to track how an industry, economy, or sector performs in general.
Here are some of the world’s major indices:
- Dow Jones (US30) – tracks 30 large, publicly traded US companies
- S&P 500 (US500) – tracks 500 large-cap US companies
- FTSE 100 (UK100) – tracks the 100 largest companies listed on the London Stock Exchange
- Australia 200 (AU200) – tracks the 200 largest companies listed on the Australian Securities Exchange
- Nikkei 225 (JP225) – tracks the 225 largest companies listed on the Tokyo Stock Exchange
As the index is basically a figure that reflects the health of the market or economy, it cannot be bought or sold directly. Thus, you can trade indices via CFDs (Contracts for Difference), ETFs (Exchange-Traded Funds), index funds, index futures, or options.
Are index funds safer than individual stocks?
A stock index is an already well-diversified portfolio. Diversification is one of the main pillars of trading stocks. It simply means having a range of various assets to minimize the risks of unexpected price movements of one asset. Therefore, indices are more sustained to unexpected market shocks than individual stocks and thus considered as low-risk investments.
Indices vs. Forex: What is the difference?
Volatility. The Forex market is highly volatile. You need to predict the movements of a single currency pair, which can be influenced by numerous factors. On the contrary, when trading indices, you predict broad movements of a certain stock market, which is less volatile.
Liquidity. Some stock market indices are less liquid than the Forex market (which is the largest and most liquid market globally).
Time strategies. Indices trading may be more suitable for long-term traders. On the other hand, Forex trading tends to be more convenient for short-term traders who prefer to profit from small price changes.
Leverage. In FBS, Forex trading has the maximum possible leverage – 1:3000. Indices are traded with leverage up to 1:33.
Please keep in mind that it is better to choose trading instruments depending on your trading strategy, level of knowledge, understanding of the particular market, and risk tolerance.