What are indices? - FXCM

What are indices?

Stock indices give you a chance to trade an opinion of an economy without having to pick individual stocks. With unique benefits to both CFD trading and spread betting, indices are some of the most popular products to trade.

Market Index: A collection of stocks

Historically, investors needed a way to analyze the overall performance of the market. After all, you could never make a statement on the US economy by only looking at, say, Apple Inc.'s stock. This need begat the stock index, generally a collection of top-performing stocks grouped and averaged to give a quick glance at the market as a whole.

An index is a good way to look at particular markets, but for investors, it offers a way to gauge the performance of their individual portfolios, so underperforming specific investments can be adjusted to be more in line with the general trend of the market.

Indices can have a variety of variables. For starters, the number of stocks in any particular index can vary wildly, from a few dozen companies to thousands. The price of an index is found through weighing. Price-weighted indices are averaged based on the price of each component stock. Capitalization-weighted indices adjust the calculation based on the size of the companies included. Many other factors are represented depending on the stock index in question.

These days, there are hundreds of stock indices globally, representing companies nationally, regionally, globally, and even by industry.


Stock Index CFDs: trading on margin

Investing in stocks has a wide appeal globally, but the barrier to entry can often be high. Say you want to invest in an economy through an index to attempt to mirror the performance of that economy. You could simply buy shares in all the stocks on the index, but that could get costly, especially in light of broker's fees for transactions. Some turn to the futures market, trading the index through an ETF. The ETF is a fund that has shares in all the stocks in the index. With ETFs, you generally have 100% margin, meaning you have to put up the full value of the index to participate.

FXCM's index products, however, are traded as contracts for difference (CFDs). With CFDs, you have the advantage of trading on margin. You put up a fraction of the capital and still get the full value of the trade. But that's not the only benefit.

Trading indices as CFDs removes the barrier to trading. When you trade on the futures market, you have settlement periods. Short selling is typically impossible without a significant account balance. Plus the fees for each transaction are significant.

Index CFDs, on the other hand, have no settlement periods, short selling is as easy as buying, and you only pay the spread. With CFDs, you can scalp the market much more easily and you can enter the market with much less in your account.

How an index CFD trade works

Unlike forex, when you trade an index, you simply buy or sell based on your opinion of how that index will perform. With FXCM, you pay only the spread to open a trade. We do not impose stop restrictions for most of our products—you can easily scalp major indices. Plus, our smaller contract sizes means you can minimize your exposure in the market.

Open a free demo to practice index trading today.