Online
Index Trading
Online trading indices is an excellent way to invest in the world's top financial markets and keep up with the top stock markets. As a financial derivative, the index is obtained by weighted average of the stock prices of the best performing companies listed on the exchange.
AvaTrade Stock Index Trading
Among major online brokers, we provide the most extensive and rich stock index trading, covering global markets. Join AvaTrade online trading index and experience highly competitive spreads, leveraged trading and secure fast order execution.
What is a stock index?
A stock index is a composite index formed by combining the performance of all related stocks. Most countries have broad market indices, such as the S&P 500 in the United States, which reflects the total value of the top 500 companies listed on US stock exchanges; or specialized indices covering specific industries, such as financial or technology indices.
The price of an index usually reflects the average performance of the individual stocks that make up the index. When the price of an index rises, it means that the value of most of its constituent stocks has risen, while only a few constituent stocks have dragged it down.
Unlike stocks, indices cannot be purchased directly. Investors trade indices by purchasing index funds or stock index CFDs.
When buying an index fund, the investment company in question allocates funds to the different stocks that make up any underlying index. Index funds are often touted as a cheaper alternative to other actively managed funds, and they can provide investors with consistent and stable returns over time.
When trading index CFDs, investors are simply speculating on the price changes of the underlying index. CFDs are particularly attractive to traders because they are leveraged products and can profit both when prices rise and fall.
Indexes are usually created and maintained by financial institutions, exchanges, or even specialized data companies. There are many ways to calculate the current price of a stock index. Here are three common forms:
Price-weighted indices are calculated in such a way that the companies with the highest stock prices have a large weight in the index. The Dow Jones Industrial Average (DJIA) is an example of a price-weighted index.
Market-weighted indexes are calculated in such a way that the constituent companies with the largest market capitalization have a large weight in the index. The S&P 500 is an example of a market-weighted index.
Non-weighted indexes are calculated in such a way that the individual stocks have the same weight in the index. KCBT (Kansas City Board of Trade) is an example of a non-weighted index.
While these are three broad methods of calculating stock market indices, there are a variety of different methods that can be applied to achieve different goals.
Some indices use divisors or modifiers to reduce the impact of the largest stocks in the index, while other capitalization methods will only consider free float stocks (stocks that can be traded publicly)
Factors that influence index prices
The composition of an index means that its price can be affected by a variety of factors. Here are some of those factors:
Financial News
Indexes are often driven by market sentiment because of their broad composition. Major economic news and events that drive market sentiment, such as central bank announcements, employment and wage data, and headlines from specific industries, such as mining data, can drive the price of an index.
Company Announcements and Events
Important announcements and events from specific companies that have a significant weighting in the respective index can also drive prices. These could be earnings reports, management changes, or even acquisitions or mergers.
Commodity Prices
The price of commodities, such as oil, has a direct or indirect impact on the economic performance of many countries. In addition, many major indices are composed of companies whose profits are vulnerable to the international prices of various commodities. This means that fluctuations in the commodity markets will also have an impact on the major indices.
Changes in Index Composition
Most indices are rebalanced regularly, with new companies being included and others being removed. The price of an index can fluctuate as investor sentiment is driven by the inclusion and removal of these companies.
Why trade index CFDs instead of ETFs?
ETFs (Exchange Traded Funds) represent units of ownership of an underlying stock or bond. They are similar to mutual funds and are traded on exchanges.
They always offer investors the practical advantages of investing in indices: diversification, high liquidity, low fees and passive investment. Index ETFs are ideal for high-capital investors seeking small but stable profits over the long term.
On the other hand, index CFDs allow investors to speculate on the price direction of the underlying index. When trading index CFDs, investors can experience the practical advantages of index ETFs, and more.
Index CFDs are leveraged products, which means that traders only need to invest a small amount of margin to control a larger trading position in the market. Leverage ensures that profits are magnified, but it can also magnify trading losses.
Leverage also ensures that traders can still make huge profits from small price fluctuations in the market, which makes index CFDs ideal for short-term trading strategies such as day trading.
When trading index CFDs, investors make profits by predicting the direction of prices, which means that whether prices rise or fall, they can make money.
At AvaTrade, you can trade major global indices with leverage up to 200:1. We also offer competitive low spreads and no restrictions on trading strategies such as hedging or short trading.
What can AvaTrade do for you?
You can visit our education section to learn more about CFDs. There are many eBooks and guides on index trading strategies, as well as market analysis videos and regularly updated blog posts. We also offer weekly webinars presented by top industry experts and investors, as well as updates on technical analysis of real-time index charts provided by Trading Central. You can find everything you need to trade index CFDs more accurately at AvaTrade.
Make AvaTrade your CFD broker and enjoy the advantages of trading with a highly regulated, award-winning broker.
