To answer the question, ‘What is indices trading’, let’s first define the term ‘stock indices’. Stock indices indicate the change in prices of a particular group of securities (most often stocks, although there are bond and economic growth indices), united by some criterion – for example, industry, capitalization, number of shares. Each stock index includes companies that differ from each other in capitalization, the number of securities in circulation, the value of a share, and liquidity. The exchange indicator is calculated using different methods and depends on the prices of the assets included in the indices (you can explore what are trading indices on popular exchanges’ resources and articles about indices trading).
How Do Indices Trade?
It is noteworthy that the price changes dynamics are more critical for indices trading than the actual price of the case of the shares. This fact helps track changes in the stock market state and predict the prospects for its further development.
It is impossible to trade the indices themselves – buy and sell transactions are carried out using standardized index futures & options. By purchasing or selling index futures, the parties to the transaction bet on the change in the underlying indicator. It means a trader, opening a long or short position on these futures, buys or sells the companies’ shares in the index.
Indices trading is carried out using CFDs of the same name – contract for difference, determined by the values of the corresponding indices or futures. The main advantages of trading indices CFDs are trading fractional lots and investing a small amount of capital using financial leverage. Thus, the indices trading allows you to speculate on the direction of movement of the underlying index without actually owning physical shares. However, this requires specific knowledge, experience, and skills in working with indices trading platforms.