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How Does an Index CFD Trade Work?

Date Modified: 26/07/2023

CFDs allow you to trade on indices without purchasing the underlying asset. This quick way of gaining exposure to the underlying asset is just one of the benefits of CFD trading on indices. These CFDs save time, in comparison to traditional markets, by allowing for instant trading during trading hours and the option to increase purchasing power using leverage. This leverage can increase potential gains but also increases trader’s exposure to potential losses.

Difference between index mutual funds and index CFDs

Traditionally, an investor would purchase a unit or share of an index mutual fund. These are compiled by traditional brokerage houses who purchase assets which are traded on the NYSE, NASDAQ, LSE, ASX, and the HKEx among others. At the end of each trading day, the fund’s assets are calculated and the value of each share is adjusted. Only at that time can a shareholder sell their share to the open market. The next day, at closing, buyers are allowed to purchase those released shares at that day’s new value. This makes trading mutual fund indices complicated because the trade is placed before the true value is calculated.

When trading CFDs, you are not purchasing the underlying asset. Rather, the trader is taking out a contract that is based on the movement of the index or instrument. What’s more, these are traded with leverage, meaning if a share is offered with a leverage of 1:10 and valued at 100 Euros, the initial payment to trade is only 10 Euros.

For example, if you choose to place a buy order and the value rises, your profit will be based on the full value of the trade regardless of the margin that was traded on. If the instrument loses value after the buy order, you will be responsible for the full loss regardless of the margin that was traded on.

Difference between Index ETFs and ETF CFDs

An Exchange Traded Fund (ETF) is a fund that may follow a full market index. For example, there is the SPDRUSA500, which follows the S&P, the iShares Russell 2000, which tracks the index of American small-cap stocks, the TQQQ which follows the NASDAQ 100, and the SPDR Dow Jones Industrial Average. They are often passively managed, which means that while there is a designated fund manager, the manager only has access to a specific percentage (such as 5%) of the overall fund to invest on their own. The rest follows a whole-market index.

ETFs are often purchased and traded in a similar manner to stocks, so unlike mutual funds that are only traded at the end of each trading day, an ETF can be purchased throughout the day. Traders should be aware that unlike stocks, there is often a transaction fee and expense ratio attached to an ETF which affects its desirability to those who are looking to make short-term transactions.

ETF CFDs allow traders to open a contract to speculate on the price movement of these ETFs using leverage and without having to purchase the underlying asset.

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Finding sector indices on Plus500

Plus500 offers CFDs on both whole market and exclusive sector indices.

To find these indices, log into your account and view instruments by category in the left column. Click on ‘Sector Indices’ and view the full list of tradable instruments.

These include:

On the right side of each index row, click the information icon to see a summary of the index, buy & sell rates, trader’s sentiments, and many other insights that help inform traders of the index’s performance.

Traders can check our Instagram, Facebook, Telegram, Twitter, and Youtube channels to see when new index CFDs are added to our platform.

In addition, Plus500 offers how-to trading guides to help you better understand trading on the Plus500 platform. Plus500’s free “Trader’s Guide” is available on Plus500’s YouTube and website.

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Final Thoughts

Index CFDs offer traders an alternative instrument to individual stocks. Moving alongside the gains and losses of multiple companies, fluctuations in indices are typically less drastic and move in line with consumer confidence or major market events. This is in contrast to individual stocks which may see volatility as a result of a failed product launch, PR problems, poor sales, or various other factors.

While an individual company’s gains and losses do have an effect on the overall index value, they may be absorbed or offset by potential gains or losses of other companies in the index, which makes index trading more versatile.

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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.

By trading index futures contracts with leverage, you can multiply the value of a trade through the use of borrowed capital, and as such, you can increase the potential profit or loss to be realised from the trade. The available leverage for index CFDs on the Plus500 platform is up to 1:20.

Here are a few highlights of trading Index CFDs:

  • You can gain diversified exposure using a single instrument – as most factors that affect individual companies are taken out of the equation.
  • More trading opportunities – we offer access to a wide range of indices from the world’s largest and most important stock markets.
  • Enjoy tight spreads and zero commissions on real-time index quotes, charts, deposits and for opening / closing trades with Plus500.

To explore more highlights and possible advantages of index CFDs, read our "What Are Indices" article.

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