An index’s value changes as the prices of its constituent shares fluctuate, so it will mirror any general upward or downward trend in stocks. 

The factors that move indices are therefore essentially the same as those that influence individual shares. The difference is that an event affecting just a single company will generally have only a minor impact on the value of any index that includes the stock.

However, economic or political events relevant to a group of companies or a business sector, such as mining companies, technology firms or banks, can have a significant effect on an index that contains these shares. As the balance of supply and demand for the stocks shifts, the collective change in share prices can cause a move of multiple points in the index. 

Of course, when an event has implications for an entire country or region’s businesses, or even the outlook for the global economy as a whole, its impact on stock indices can be dramatic.

1. Influential events

You can expect movement in the value of an index when the following events occur in a related country or business area:

• Economic data releases
• Natural disasters
• Geopolitical events and wars
• Central bank announcements
• Corporate news either good or bad
• Government policy, legal and regulatory updates

All of these can affect investors’ confidence in the prospects of companies to grow and generate profit, which in turn directly shapes market sentiment.

2. Market sentiment 

The collective mindset of traders and investors affects the movement of all indices. 

Major or unexpected events in particular can sometimes cause a surge in bullish or bearish sentiment, leading to pressure from buyers or sellers that forces share prices and eventually index values – up or down. A correction is often seen later, as traders calm down and equilibrium is restored.

Index trading is a relatively secure form of trading with integrated money management. The risks of trading indices are always lower than the risks of investing in individual stocks.

• Indices are the least manipulative financial instruments. The price of an index changes according to the price fluctuations of the constituent companies that make up that index.
• Embedded money management scheme. Trading indices, you are diversifying your investment; you simply don’t put all your eggs into one basket. With the NASDAQ 100 index, you diversify into the most-prominent American high-tech companies.
• Lower risks. Though indices can also be volatile due to factors like geopolitical events, economic forecasts and natural disasters, an index losing or gaining 10% is already a huge historical event that will often hit the news.
• Benefit from the global economic situation. By investing in a group of companies, you benefit from the positive or negative dynamics of the global economy. If one company fails, the index can still rise.
• No risk of bankruptcy. Unlike an individual company, an index can’t go bankrupt. If a FRA40 constituent goes bankrupt, it is replaced by the 41st company in the list of leading France companies.

1. Choose way to trade indices

2. Choose from cash indices or index futures

3. Open an account and log in

4. Choose the index you want to trade

5. Decide on long or short entry

6. Set your stops and limits

7. Open and monitor your position

1. Choose way to trade indices

With Winstoneprime, you can use CFDs to trade indices. CFDs are financial derivatives, which mean you can use them to speculate on indices that are rising in value, as well as falling.

2. Decide whether to trade cash indices or index futures

While trading with Winstone prime, there are two ways to get exposure to an index’s price: by trading cash indices or index futures.

Cash indices

Cash indices are favoured by traders with a short-term outlook – such as day traders – because they have tighter spreads than index futures. Cash indices are traded at the spot price – which is derived by taking the front month futures price and applying fair value.

Many traders will close their cash indices positions at the end of the trading day and open new positions the following morning to avoid paying overnight funding charges.

Index futures

Index futures are usually preferred by traders with a long-term market outlook. This is because, while they have wider spreads than cash indices, the overnight funding charge is included. Index futures are traded at the futures price – the price that futures traders agree in the present for delivery in the future.

If you plan on holding on to an index position for a long time, trading index futures will mean that you don’t incur frequent overnight funding charges.

3. Open an account and log in

To start trading indices with CFDs, open an account with Winstone Prime. A brokerage firm that provides 15+ world’s famous stock indices with tight spread.

4. Choose the index you want to trade

It’s crucial to choose an index that suits to your trading style. This will depend on your individual appetite for risk, available capital and whether you prefer taking short-term or long-term positions.

For example, the Germany 30 is usually a volatile index which is favoured by traders with high risk appetites and who prefer short-term trading. On the other hand, the US 500 is largely known for its steady returns over time, making it a favourite with traders with lower appetites for risk and a long-term outlook.

5. Decide on long or short entry

Going long means that you are speculating on the value of an index increasing, and going short means that you are speculating on its value decreasing.

If you find the economic outlook for an economy or sector is good based on the performance of the companies on an index, a long position could help you realise a profit if the index increased in value.

If the outlook is poor – possibly because large companies on a capitalisation-weighted index are underperforming – you might want to go short on the expectation that the index will fall in value.

6. Set your stops and limits

Stops and limits are essential tools for managing your risk while trading indices. A stop order will close your position automatically if it goes to a less favourable level than the current market price, while a limit order will close your position automatically if it goes to a more favourable market price.

7. Open and monitor your trade

When you think you’re ready to start indices trading, it’s time to open your trade. Open Winstone Trading Platform, Enter your position size, and click ‘place deal’ to open your trade.