CFDs Stock Indices
We are pleased to dedicate this page to trading stock market indices or, more accurately, the trading of index CFDs. Many of you are searching for information on this particular financial instrument, so we will discuss this for those who wish to undertake some trading on indices.
Firstly, we will focus on the concept of “stock market indices”, which is a statistic used to measure variations in the prices of shares listed on the stock market. Here, we are speaking of a “basket” of equity securities and their value represents this set as a whole. Simply put, indices are like the “thermometer” in a group of shares.
Types Of Indices
Indices are calculated using one of three methodologies:
Equally Weighted Indices: In this calculation there is a parity between the factors being considered for all of the titles that make up the indice. The capitalization of the companies involved is not taken into consideration with this calculation.
Price Weighted Indices: In this indice, each title is assigned a different weight according to their price. This is an easy way to calculate the indice, but it doesn’t accurately reflect the trend of the entire portfolio. For this reason, this particular indice is mainly used to represent titles with higher prices.
Value Weighted Indices: These are the most common type due to being the most fair and correct. The indices assign each title a weight, proportional to the capitalization of the issuing company and they are adjusted each time the company performs any act of unbundling, paying of dividends, grouping, dividing and so forth.
Some examples of Value Weighted Indices are: S&P500 (USA), FTSE Mib (Italy), CAC40 (France), DAX30 (Germany), FTSE 100 (UK) and Topix (Japan).
Two examples of Price Weighted Indices are: the popular Dow Jones (USA) and Nikkei 225 (Japan).
What Does It Mean To Invest In Indices?
Now that we know what Indices are and how they are calculated, let’s aim to understand why we should invest in them and how to go about doing so.
Firstly, the difference between investing in a share (or a chosen group of shares) and investing in an indice, is in the desire to pinpoint either a single company or a group of companies that allows you to have a so-called diversification of your portfolio. Focusing on one company means to keep track of their affairs, their strategic planning and what goes on both internally and externally.
Focusing, instead, on an index means following a set of companies that will inevitably move along the same course within the same economy.
Investing in stock market indices is, therefore, relatively more simple compared to what happens with shares. If you think about this example; it could be a growth year for a particular country, so investing in an index involves a much simpler choice, even if it means lower earnings with respect to what you may gain investing in just one strong and growing company.
On a set of scales we are given the options of having either ease of choice or growth potential. The choice is then yours as to whether you wish to focus on a strong increase or on a path that is easier to predict.