How to Trade Indices

While stock values can give a picture of the health of specific companies, indices give traders a wider outlook regarding the state of the financial markets. With an index being formed of a variety of different stocks, there are therefore more features to take into account than is the case when trading the stocks of a single company.

How to Trade Indices

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How to Trade Indices

How to Trade Indices

Indices are not traded in a very different manner to other types of Spread Bet and CFDs. Traders take a position, the direction of which will be contingent on the direction that they believe the price of the overall index will go in. The trader will either look to sell their stake for more than they purchased it at, or buy at a lower price than they had previously sold.

The level of the index is calculated by taking into account the varying fortunes of the different stocks within it. If the stocks as a whole are seen to be strong, then the level will rise. Conversely, it will fall if the stocks within are weak.

Trading Indices

Trading Indices

Trading Indices

Trading_Process

Indices are not traded in a very different manner to other types of Spread Bet and CFDs. Traders take a position, the direction of which will be contingent on the direction that they believe the price of the overall index will go in. The trader will either look to sell their stake for more than they purchased it at, or buy at a lower price than they had previously sold.

The level of the index is calculated by taking into account the varying fortunes of the different stocks within it. If the stocks as a whole are seen to be strong, then the level will rise. Conversely, it will fall if the stocks within are weak.

Index Volatility

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Index Volatility

Index Volatility

Indices can be subject to a large amount of volatility; this is because of the nature of indices, which are comprised of a large number of different stocks, all subject to their own individual price fluctuations. That said, changes are generally limited to within a couple of percentage points each day, as it’s uncommon for all the stocks within an index to move sharply in the same direction at once. That’s not to say it can’t happen, though, as stock market crashes have proved in the past.

Indices Trading: An Example

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Indices Trading: An Example

Indices Trading: An Example

Let’s say that we intend to take a position on the FTSE100. This index is currently trading at 6959:6960 - the spread is calculated as one point. We buy £10 of the FTSE at 6960. That means that our current liability is £10, because if we were to close the position by selling at 6959, this is the amount of loss we would incur.

The index rises to a level of 6965:6966. At this level if we were to sell our £10 worth of FTSE, we would make a profit of £50. The level has risen by six points, so the first point move cancels out our £10 loss and the subsequent five points translate into £50 of profit.

If however, the FTSE were to fall to a level of 6955:6956, we would lose £50 if we sold. The price at the point of sale would be five points lower than the level at which we bought at.

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