Home Stock Market Indices Trading: user guide and demo

Stock Market Indices Trading: user guide and demo

We are pleased to dedicate this page to trading on stock market indices or simply put, trading through index CFDs. Many users are currently looking for information about this particular financial instrument. For this reason, we will start discussing this in case you wish to learn more about this topic. In case you want to start trading on stock indices right away, the best way to do so is to download this free platform.

First of all, let’s focus on the concept of the “stock market index”, which is a statistic used to check the changes in stock prices of listed companies. It is a “basket” of stocks and its value represents this set as a whole. Simply put, we can say that indices represent the “thermometer” of a group of shares.

Types of Stock Market Indices

Indices are calculated using three methods that define their type and they are:

  • Equally-weighted Indices: the term “equally” stands for “equality” and in this calculation, there is equality between the weighting factors for all the securities forming part of the index. The capitalization of the companies included in the list is not taken into account in this calculation.
  • Price-weighted Indices: these indices have each security to provide a different weight depending on its price and these are easy to calculate but do not perfectly reflect the trend of the entire portfolio. For this reason, the highest-priced securities are represented more prominently in this index.
  • Value-weighted Stock Market Indices: these indices are the most widely used as they are considered to be the most correct and fair. They associate securities with a weight proportional to the capitalization of the issuing company and are also adjusted each time companies carry out splits, pay dividends, make groupings, demergers and so on.

Some examples of value-weighted indexes are S&P500 (USA), FTSE Mib (Italy), CAC40 (France), DAX30 (Germany), FTSE 100 (England), Nikkei (Japan).

As for the other types, some examples include the popular Dow Jones (USA) and the Nikkei 225 (Japan).

What Investing in Indices Means

Now that we have seen what indices are and how they are calculated, let’s try to understand why there is a need to invest in indices and learn how you can do it.

First of all, the difference between investing in a stock (or a group of stocks of your choice) and investing in an index is the desire to focus on a single company or a group of companies that also allows you to have a diversified portfolio. When you focus on a company, that means that you should follow its events, strategic plans, external and internal events, etc.

When you bet on an index instead. this just means that you wish to follow a set of companies that will necessarily move within the same path and the same economy.

Investing in stock market indices is therefore relatively easier than those that deal with shares. If you think that a year will be a year of growth for a certain country (e.g. 2014 for the US), when you invest in an index, this will involve a simpler choice even if the gain is lower than that which could be obtained by investing only in a strong growing company.

To balance things out, we can put ease of choice and potential for growth. It will be up to you to decide whether you should focus on a stronger rise or to lead a path that is more easily predictable.

Investing in Online Indices

To invest in stock market indices, you do not have to go to a specialized counter in a bank but you can do it from the comfort of your own home thanks to the CFDs provided by online brokers. Online broker companies themselves provide free platforms with which to carry out transactions (buying and selling even in a very short time).

Some brokers, such as Plus500, offer the possibility to open a demo account that allows you to practice with a free account but with virtual money. Practically speaking, you will have to deal with the same data in real time depending on the performance of the Stock Exchange and you can make all kinds of transactions but without using real money, this will only affect a deposit of virtual money that will be credited to you for free. In short, learning is free.

When you wish to do so, you can switch to a real account where you can operate with real money (although this is not necessary as it is important to say so).

Nikkei 225

Hong Kong 50

CAC 40 Index

FTSE Athex Index

Euro Stoxx 50

DAX 30 Index

FTSE 100 Index

S&P 500 Index

Dow Jones 30 Index

NASDAQ 100 Index