What are indices?
Indices are a measurement of equity markets. There are lots of different types of indices, including ones that:
- Measure the entire broad market, such as the Russell 2000
- Measure a small cross section or sector of the economy, such as the Dow Jones Industrial or the Dow Jones Transportation
- Are used as a proxy for a country’s economy, such as the S&P 500 in the US, the FTSE 100 in the UK or the Nikkei 225 in Japan
- Measure regional economic performance, such as the FTSE Developed Asia Pacific Index
- Measure a broad range of companies, such as the Wilshire 5000 that includes almost every US-listed company
Majors, exotics, minors
- Equity indices are broken down into three categories – major, minor and exotic.
- Major indices mimic the world’s largest developed economies, including the S&P 500 and Nasdaq Composite in the US, the FTSE 100 in the UK, the DAX in Germany and the Nikkei 225 in Japan
- Minor indices are more regional and are typically less followed, including the Hang Seng in Hong Kong, the Kospi in South Korea and the S&P/TSX in Canada
- Exotic indices are even less closely followed and are comprised of smaller markets in Central and South America, Eastern Europe, Southeast Asia and more
How an index trade works
An index is a mathematical construct, so you can’t trade them. However, there are ETFs, funds and CFDs that mimic the construction of the index or have a value based on it.
You think the S&P 500 will rise above its current level of 2,335. You buy 10 CFD contracts with a 2,335 strike price. These contracts have a total value of $23,350 but because you’re trading with 100:1 leverage, you only need to put up $233.50 as margin. Every point the S&P 500 moves is worth $1, so your 10 contracts rise or fall by $10 for every point the index moves. The US releases better than expected GDP data and the S&P 500 rises to 2,350. You close your position and profit $150.
Cash-based CFDs don’t have an expiration date, but those based on futures contracts do. That means you can wait for your position to automatically close on the expiration date or manually close the position before the expiration date.
Before the expiration date, there is a 10-18 day period where you can buy new contracts on the same index with later expiration dates.
The measure of the value of the equities the index is based on is called a point. As indices are statistical measurements of underlying securities, the point movement of each index is different, but is also equal to $10. Each point change in a CFD based on indices is equivalent to $1.
If you’re discussing indices, a lot is equal to one contract and each point move is the equivalent of $1.
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