Trading Index CFDs
An index is made up of the shares of a group of companies traded on a stock exchange. It usually includes the shares of the leading and most actively traded companies and can be used to measure the performance of an industry sector or a country's economy as a whole.
The USTECH100 index, for instance, is based on the performance of the top 100 non-financial US companies (such as Amazon, Google and Facebook) traded on the Nasdaq Stock Market in New York. It reflects the shares of companies across major industry groups including computer hardware/software, telecommunications, retail/wholesale trade, and biotechnology.
If the shares of the companies in the index went up, then the whole index would rise in line. And vice-versa, if share prices fell, then the index would fall too.
Some of the most closely monitored global indices are the US30, the UK100 and the EUGERMANY 30, with each of them comprising the shares of the leading companies in the US, UK and Germany, respectively.
Company share weight and index pricing
The selection of company shares within an index is known as its basket, with each company shares having a different weight, which is dynamic. For instance, on 13th August 2018, the shares of the top three company shares in the US30 benchmark were: Boeing (9.11% weight), UnitedHealth Group (7.02%), and Goldman Sachs (6.11%). For comparison, on 7th June 2017, the top three companies in the index were: Goldman Sachs (6.98%), 3M (6.63%) and Boeing (6.08%).
Some indices, the UK100 for example, are calculated using a capitalisation-weighted average. This means that the more a company is worth, the more its share price will affect the index as a whole.
Indices such as the US30 and JAPAN225, on the other hand, are price-weighted: they include an equal number of shares of each company, meaning that shares with higher prices have more influence.
In a nutshell
- An index comprises a select group company shares from a particular stock exchange; the shares of each company have a different weight within the index.
- Indices are mainly region based, and can be used to measure the performance of an industry or the economy as a whole.
- Sector indices (i.e. USTECH100) give you insight into the market sentiments and the prospects for a certain industry, which can help you decide when to buy or sell individual shares in the index.
- No need to create a portfolio of individual shares – you save up on transaction costs.
- You can place both Buy and Sell trades in Index CFDs in the same way as you trade individual Share CFDs.
Deltastock offers trading in the most important European, US and Asian indices as CFDs. See the full list here.
Example Index CFD trade
Let us assume that the required margin is 5% and you have $2,000.00 in your account. You would like to buy 1 CFD on the miniUS30 index at a market price of $2,500.00 (approx. 1/10th of the price of the standard US30). In order to place the trade, you need a margin of $125.00. The remaining $1.875.00 in your account are available funds that you could use to trade other financial instruments.
In case the market price increases to $2,550.00, you will realise a current profit of $50, which will be reflected in your account equity. The blocked amount will increase to $127.50 ($2,550.00 х 5%), and the account equity will become $2,050.00, of which $1922.50 ($2,000.00 + $50 profit – $127.50 margin) will be free funds available for other trades.
Now you have two options:
- Close the position by selling the CFD on the index at the current price of $2.550.00 and realise a profit of $50.00, which will be reflected in your account,
- or hold on to it in anticipation of a price increase, such as the price of the index further increasing to $2,600.00. In this case, you will realise a profit of another $50 – but at the risk of a fall in the price of the index.
In case the market price of the index falls to $2,450.00, you will realise a current loss of $50.00, which will be reflected in your account equity. The amount blocked as margin will fall to $122.50 ($2,450.00 x 5%), the equity will also shrink to $1,950.00, and the available funds in your account will be $1,827.50 ($2,000 - $50 loss – $122.5 margin).
Now you have two options:
- Close the position by selling the CFD on the index at the current price of $2,450 in order to minimise higher future losses, in which case your account balance will fall to $1,950,
- or keep your position open in anticipation of a more favourable price – but at the risk of a further drop in the price of the index.
Dividend adjustment payments
Dividend adjustment payments are payments similar to dividends, which are charged or paid to clients holding open positions in CFDs on shares, indices and/or ETFs. Similar to a direct investment in the underlying instruments, their CFDs are subject to corporate events, including ones related to the payment of dividends.
When it comes to indices, in most cases the availability and distribution of dividends to their holders follows the availability and distribution of dividends of the shares included in the index. There are exceptions, however, where dividends are not paid, and the respective corporate events are reflected in the price of the index.
The dividend adjustment payment is set by the so called „ex-date”, or the first day after the date on which, if the client is a shareholder in the company, they will be entitled to receive a dividend. With the arrival of that date, shares start trading without the right to a dividend, which is reflected in their price.
The ex-dates for indices follow the ex-dates for the shares comprising the index.
If by the ex-date you hold a long position in an index CFD, you will receive a dividend adjustment payment, while if you hold a short position, it will be withheld from your account. The amount of the dividend adjustment payment is proportional to the weight of the company in the index.
Each country has a different practice when paying dividends. In most European countries, for example, dividends are paid once a year, while in the US this is happening on a quarterly basis.
Find out more about dividend adjustment payments in CFD trading.
Interest for trading CFDs on margin is an additional amount that is owed when using borrowed funds for the rollover of a position to the next business day, and is calculated as a percentage of it. The amount can be a positive or a negative number.
If you have an open position in CFDs on Indices at the end of the business day, which has to be transferred to the next day, interest is debited (withheld) from or credited (added) to your account.
Note: When trading Index CFDs 100% margin (Cash CFDs), interest is neither credited nor debited.
If you have holding a long position, interest will be withheld from your account.
If you have a short position, interest will be paid to you when the interest rate on your position is a positive number. Interest will be withheld if the interest rate on your position is a negative number.
Find out more about interest in CFD trading on margin.
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Note: The information displayed on this page is for educational purposes only and is not a personal recommendation or investment advice. Any quotes of financial instruments in the examples are for reference purposes only and do not reflect the current market situation.