Stock indices are a statistical indicator measuring the combined value of a number of stock prices, and they are usually formed with a certain number of leading stocks from a given market. For example, the FTSE 100 represents the top 100 stocks in the UK. Other indices include the ASX 200, China H-Shares, FTSE 250, France 40, Germany 30, Hong Kong HS42, Singapore Blue Chip, Japan All-Share, Wall Street, US SPX 500 and US Tech 100.
Stock indices around the globe move higher or lower depending on investor reactions to a range of factors, such as company updates, economic announcements, political decisions and natural disasters. A change in any stock on the given index will change the overall value of the index. Although a stock index is not a tradeable product in its own right, investors can trade on the rise and fall of its value.
When trading CFDs on stock indices you can go long if you believe the value of an index will rise – i.e.: buying the CFDs and selling them at a higher price once the value has risen. You can also go short if you think the value of an index will fall – i.e.: selling the CFDs and buying them back at a later stage once the value has fallen, making a profit on the difference between the opening and closing values when you close your position.
For instance, if the Australia 200 Cash is quoted at 4795/4796 and you think that its value will go up, so you purchase two contracts at 4796, making a deposit of $1,250 ($625 per contract). One standard contract equals $25 per index point, so for every point the index goes up you will make $50, and for every point it goes down you will lose $50.
After five days the Australia 200 Cash Index has risen to 4895/4896 and you choose to take your profit, selling the two contracts at 4895. The difference between your opening and closing position is 99 (4895 – 4796). Your gross profit is 99 points x 2 contracts x $25 = $4950.
CFDs on stock indices can also be short sold, giving you the opportunity to profit in falling markets as well as rising ones, with the security of setting guaranteed stops to limit your losses.
Index CFD trading gives you access to 24-hour trading across global stock markets and, being a geared asset, it gives you high exposure with capital requirements from just 5% of the value of the position.