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Index trading explained
If you can’t wrap your head around the concept of indices, just imagine a basket filled with eggs. Instead of buying an egg at a time – individually checking and weighing it - now buy a whole basket as one unit. An index is made of a number of stocks. It aims to measure a section of the stock market and through it, investors can essentially invest in a section of the market, rather than in individuals shares. An index can also offer information regarding certain markets or industries.
Trading CFDs on indices
While many people around the world trade indices, some choose to trade indices online in the form of CFDs (Contract for Difference). This means that instead of trading the actual index, you invest in the index’s price.
On the Vestle trading platform, you can trade many index CFDs from multiple regions and industries. For example, you can trade the US 30, which is based on the performance of the Dow Jones Industrial Average or the Germany 30, which is based on the performance of the DAX 30.
Leverage is a powerful trading tool that simultaneously increases your trading power and risk. How? By allowing you to open large deals with a relatively small investment. Maximum leverage differs from one CFD instrument to another and depends on the regulators. For indices, the maximal leverage is currently 10:1, meaning that with a £500 investment, you can open deals worth up to £5,000.
Why? Because £500 (investment) x 10 (leverage) = £5,000.
Clear enough? Great, now let’s revise short and long trading.
Sell or Buy?
Let’s say you invest in an ETF CFD and believe the price will increase. What would you do? That’s right: You buy the ETF, intending to sell it later on when the price (hopefully) follows your prediction and goes up. This is called a ‘Buy’ deal and some people also refer to it as ‘long trading’ or ‘going long.
Now, let’s say you expect the price of an ETF CFD to decrease. Is there nothing you can do? Of course there is. If you believe the price will decrease, open a ‘Sell’ deal, also known as ‘short trading’ or going short.
The fact that you can trade CFDs ‘both ways’ allows you to try and take advantage of uptrends as well as downtrends.
Opening an index CFD deal with Vestle
- Choose an Index CFD (use the categories to find what you want)
- Figure out your deal size (how much of your equity you want to invest)
- Decide the direction (Buy or Sell, long or short)
- Click ‘Deal’
What do you do when you have 20 deals open at the same time, or when you invest in an index operating in a different time zone? Stop Loss and Take Profit orders will help you manage your risks and monitor your deals – even while you’re asleep.
What factors can affect the price of indices?
- Interest rate decisions
- Changes in global economy
- Economic reports
- Natural disasters
- New taxation
- Technological/industrial advancements
Want to expand your knowledge of index trading and CFDs? Register now to receive free trading tutorials, market updates and a free Demo Account.