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Overview of Indices CFDs
CFDs on Indices trading invloves leverage, meaning any potential profit or loss will be multiplied. For example, if you trade with leverage of up to 1:20, 100 € can have the effect of up to 2.000 € in capital.
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What is Indices trading?
Trading indices CFD involves the buying or selling of Index Contracts for Difference. This type of trading centers on monitoring stock market indices, which are compilations of various stocks. Traders focus on these major indices, such as the S&P 500 or the Dow, predicting the collective movement of stocks within them rather than individual shares. In other words, indices CFDs offer a snapshot of broader market trends by measuring the movements of stocks, hence reflecting the health of the overall economy as well as specific markets.
Steps to start
Follow the 4 steps below:
- Choose your Indices trading method
- Find out more about the Indices market
- Open and verify your Plus500 account
- Plan your Indices trading strategy
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Indices FAQ
A stock index is a performance indicator or measure of a country's economy or of an industry sector. For example, Nasdaq 100 represents the largest 100 companies traded on the Nasdaq Stock Exchange. If, on average, the share price of these companies goes up, then the index will rise. Conversely, if they fall, the index will drop.
Most main indices are based on a basket of shares and are thus considered good measures of the current market sentiment. When you take a position on an index, you are effectively investing in the performance of these shares and thus avoid factors that influence the performance of individual companies (such as a lack of market volume). For a full list of index futures CFD offered on the Plus500 platform, click here.
Stock market indices have different forms of calculation. These are the two most common:
- Adjusted market capitalisation (or cap-weighted) is used to track a number of companies based on the adjusted market capitalisation of the constituent stocks. Large-cap companies have a greater impact on the index’s price than small-cap companies. S&P 500 is an example of an index that is calculated this way.
- Price-weighted average – adds up the stock prices of all constituents, and then divides that figure by the total number of stocks in the index. Dow Jones is an example of an index that is calculated this way.
Leverage on Index CFDs enables traders to gain exposure to a larger market position by using a smaller initial margin. For instance, with 1:20 leverage, a trader can open a position worth €2,000 by depositing €100 as margin.
While leverage can enhance returns when the market moves in the trader’s favor, it also increases the potential for losses if the market moves against the position. Losses may exceed the initial margin, and it's important to understand the associated risks.
Traders should use leverage cautiously and ensure it aligns with their risk tolerance and investment objectives.
Index CFDs typically involves the following characteristics:
- Indices represent a group of stocks, which can reduce the impact of individual company performance on overall price movements.
- Traders can gain exposure to various major international stock markets through a range of available indices.
- Index CFDs are generally quoted in real time, and trading costs may vary depending on the platform used. These can include spreads, overnight funding, and other applicable fees.