Trading Stock Indices
An index is made up of a group of companies traded on a stock exchange. It usually includes the top companies on that exchange and can be used to measure the performance of a select group of shares, based on size, 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 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 include the US30, the UK100 and the EUGERMANY 30 – each of them comprising the top companies in the US, UK and Germany, respectively.
Company weight and index pricing
The selection of companies within an index is known as its basket, with each company having a different weight, which is dynamic. For instance, on 7th June 2017, the top three companies in the US30 benchmark were: Goldman Sachs (6.98% weight), 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 of companies from a particular stock exchange; each company has 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.
- 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 1% and you have $2,000 in your account. You would like to buy a CFD on 1 US30 index at a market price of $21,170. In order to place the trade, you need a margin of $211.70. The remaining $1,788.30 are available funds that you could use to trade other financial instruments. In case the market price increases to $21,500, you will make a $330 profit, which will be added to your account. The blocked amount will increase to $215 ($21,500 х 1%), and the total account balance will become $2,330, $2,115 of which will be free funds available for other trades.
Now you have two options:
- Sell the CFD on the index at the current price of $21,500 and realise a profit of $330, which will be added to your current account balance,
- or hold on to it in anticipation of a price increase, such as the price of the index increasing to $21,650. In this case, you will realise a profit of another $150 – but at the risk of a fall in the price of the index).
In case the market price of the index falls to 21,000, you will lose $170, which will be deducted from your account. The funds blocked as margin will become $210 (21,000 x 1%), and the available funds will shrink to $1,620, which would give you an account equity of $1,830.
Now you have two options:
- Sell the CFD on the index at the current price of $21,000 in order to minimise higher future losses, in which case your account equity will remain $1,830,
- 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.
A dividend is part of a company's profit that is distributed among shareholders.
Whenever a company included in an index announces payment of dividends, this will be reflected in your account if you have an open position in that index. The amount of the dividend that you will receive (or pay) is proportional to the weight of the company in the index.
If you are holding a long position, your broker will pay you a dividend, while if you are holding a short position, the dividend amount will be withheld from your account.
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 dividends in CFD trading: what is an ex-date, how it affects share prices, and how are dividends calculated.
When trading on margin, you actually borrow money from your broker in order to open a position. Interest on the borrowed amount is either charged or received if you have open positions in Index CFDs, which have to be transferred to the next business day (00:00 h EET).
Note: When trading Index CFDs 100% margin (Cash CFDs), interest is neither charged nor paid.
If you are holding a long position, interest will be withheld from your account.
If you are holding a short position, interest will be paid to you if 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: when is it charged or received and how is it calculated.
Additional educational resources:
Note: Views expressed here are for education purposes only and are not the views of Deltastock or its employees. These views are not personal recommendations or investment advice. Any quotes of financial instruments displayed on this page are for reference purposes only and do not reflect the current market situation. You may wish to seek independent advice before entering into transactions.