Trade Stock Indices Online

Trade Equity Index Cash CFDs with MetaTrader 4

FXTRADING.com provides access to global stock market Indices from North America, Europe and Asia. A popular choice for traders of all timeframes and styles, our Index CFDs trade close to 24 hours a day, 5 days a week.

What Are Indices?

In finance, an index is a group of equities pooled together which track their collective performance over time. Typically, an index will represent large, medium or small cap stocks for a country or region, although it’s large cap indices which typically get quoted by the media.

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For example, the S&P500 tracks the largest 500 companies in the US, whereas the Nasdaq 100 focuses on the largest 100 technology stocks in the US. Although some equities such as Facebook or Amazon appear in both indices, they wouldn’t be listed in the Dow Jones Industrial Average which tracks the 30 largest industrial stocks in the US. Overseas counterparts include the German DAX, French CAC 40, Australian ASX200 and Japanese Nikkei 225.

Being highly liquid instruments, they are well suited to technical analysis which is why they appeal to swing traders, end of day (EOD) and intraday traders. Yet they are equally suited to fundamentals and traders who take a macro view due to their long-lasting trends and volatile moves.

How Do Indices Work?

All indices offered by FXTRADING.com are a CFD (contract for difference) derived from underlying cash markets. Being a derivative, traders are free to trade long or short on margin by using leverage, without owning the underlying market.

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Long example: Dow Jones (US30)
A trader buys one contract of US30 at 26,250 as they believe it will trade higher over the coming sessions. They enter a stop loss beneath yesterday’s low at 25,585 (665 points) and a take profit near a technical resistance level at 27,000 (750 points).

  • Enter long: 26,250
  • Stop loss: 25,585 (-665 points)
  • Tape profit: 27,000 (+750 points)

If the market rises and hits their take profit at 27,000, they exit the position with a profit of around $750.

Should the market fall and hit their stop loss, they would expect to exit the position with a loss of around -$665.

 

Margin and leverage:
Margin is the amount of money required to open a trade, which is usually a fraction of the underlying market’s value. A broker is able to ask for a fraction of the full amount by offering leverage, which is the inverse to margin.

For example, with leverage off up to 100:1 offered for index CFDs, the margin requirement is 1% of the total trade value. So if a trade with a value of $5,000 is placed with 1% margin (100:1 leverage), $50 will be removed from ‘free equity’ of your balance whilst the trade is open.

If a trader uses 10:1 leverage, the margin requirement to open the same $5,000 trade would be $500 (10% of $5,000).

Margin Example: Short AUS200 contract

  • Entered short = 5,987
  • Contracts sold = 1
  • Leverage = 100:1
  • Margin required = $59.87
    • (Number of contracts x Entry Price) / Leverage
    • (1 x 5,987) / 100

With just $59.87 in collateral, a trader is effectively trading the price fluctuation of the entire index.

  • Without leverage, the margin requirement would have been $5,987
  • With 10:1 leverage, the margin requirement would have been $598.70

 

Costs associated With Index CFDs

Spread:
When a trade is placed, a trader is looking to buy (go long) or sell (go short) a market. A transaction cost of entering the trade is the spread, which is simply the difference between the bid and ask prices. These can be found on the deal ticket and within the ‘Market Watch’ window of MT4.

For example:

  • If the ASX 200 (AUS200) shows a Bid/Ask of 5980/5981
  • The spread is 1-point (5981 – 5980)

If an open trade is risking $1 per point, then the transaction cost of entering the trade is $1. If an open trade is risking $10 per point, the transaction for the trade would be $10 using the above example.

 

Swaps:
Swaps are a small overnight holding charge for CFDs, and the calculation is based upon the interbank rate of the currency in which the CFD is traded in.  For example, US indices such as US500 are traded in USD, so the US interbank rate is used in the calculation. Whereas the AUS200 would use Australia’s interbank rate.

 

Indices Are Denominated In Their Country’s Currency
As index CFDs are based on exchanges around the world, each one is traded in their home currency. For example, US indices such as the Nasdaq and S&P500 are traded in USD, whilst Australia’s ASX200 is traded in AUD. As a trading account is denominated in a chosen currency, this should be factored in if trading overseas indices as currency risk will also be present.

For example, an account in AUD would be exposed to the fluctuations of AUD/USD if a trade is placed on a US index. Yet trades placed on the ASX200 from an Australian dollar account would not be exposed to currency risk.

Advantages of Trading Indices

  • Trade long or short
  • Trade on margin
  • Trade risk sentiment
  • Trade a broader directional view on equities
  • Trade the outperformers / pairs Trading
  • Dilute the risk of stock-surprises
  • Hedge a portfolio or equity
  • Highly liquid instruments (play nicely with technical levels)
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Trade Long or Short
The ability to trade long (rising markets) or short (falling markets) is a luxury not always present on stock markets or futures. Equity brokers can limit or halt the amount of shares they lend to bearish speculators and, if a futures market hits limit up or down, traders cannot enter or exit a position on that market. CFDs do not suffer from this issue – traders are free to trade long or short CFDs of their choice. This makes indices very appealing to swing traders, intraday traders and position traders regardless of underlying market conditions.

Trade on Margin
With leverage of up to 100:1 offered by FXTRADING.com, margin requirements for our global indices remain low. This means the amount required to deposit to trade a cash CFD is relatively low compared with the value of its underlying market.

Trade Risk Sentiment
Indices are an excellent barometer of risk appetite, which means that equities tend to rise when investors are feeling confident about the future and want to take more risk. Conversely, indices tend to fall during bouts of risk-off. Whilst other factors are also at play for market direction, when something large and unexpected hits trader’s screens across the globe, correlations between risk assets become strong and they generally rise or fall in tandem.

This provides traders with ample of opportunity to trade both long and short as the pendulum swings between the two states of risk-on and risk-off.

Examples of risk-off themes could include, but not limited to:

  • Geopolitical tensions (eg. War in middle east, trade wars)
  • Surprise election or referendum results (eg. Trump or Brexit in 2016)
  • Viral outbreaks (eg. Covid-19)
  • Government defaults (eg. Argentina bond defaults, lower credit ratings)
  • A break of a currency peg (eg. EUR/CHF in 2015)

During periods of risk-off, it is not unusual to see global indices fall in tandem whilst safe-haven assets like gold, the Japanese yen and Swiss franc rise. Conversely, these moves can quickly reverse once the tensions reside and markets revert to ‘risk-on’ mode, seeing global indices rise again.

Trade a Broader Directional View on Equities
Indices allows traders to take a positional view on the broader market and not focus on individual stocks. For example, they may be bullish on the US economy so choose to enter long positions on the S&P500 (US500). Or they may be bearish on Japanese equities so decide to short (sell) the Nikkei 25 (N225).

Trade the Outperformers / Pairs Trading
Whilst some traders prefer to exclusively trade one or two indices, another approach is to select indices they believe will outperform (or show stronger levels of momentum) in a certain country or sector. For example, a trader may be bullish on US equities but believe technology stocks will outperform, so they deice to trade the Nasdaq 100 (USTEC) over the S&P500.

Taking this a step further, indices are an excellent vehicle for pairs trading (spread trading). This is where a trader will go long one index and short another. In doing so, the trader effectively hedges out ‘market risk’, which is the risk that markets fall in tandem following an exogenous event. By being long one index and short another, if all indices are to fall it can limit the downside of the investment. However, the opposite is also true; if all shares rise it can limit upside potential. This is why it is important for the trader to correctly identify the outperformer, as the stronger index is presumed to rise faster than other indices, and not fall as far if all markets fall in tandem, offsetting downside risk in the process.

Dilute the Risk of Stock-Surprises
Because indices are made up of a basket of stocks, earnings surprises from individual companies (whether positive or negative) make less of an impact on the underlying index. This makes excessive gaps less likely whilst the markets are closed, allowing traders to better manage their risk.  Of course, if we find the multiple companies are missing or exceeding their earnings expectations, it will have a greater impact on the index. Yet trading the individual index is easier to manage under this scenario.

For example, the S&P/ASX200 (AUS200) is enjoying a bullish rally, yet one of Australia’s ‘big four’ banks, Westpac, sells off sharply due to an unexpected earnings surprise or lawsuit. Whilst it could still have a negative impact on the index, its impact on the ASX200 should be relatively muted.

As all stocks and indices are weighted slightly differently, it can help to at least have a basic awareness of the makeup of the index and keep an eye on earnings releases to better time entry of trades.

Hedge an Open Position or a Portfolio
To hedge an open position, a trader would open a position in the opposite direction to their initial trade. There are a few reasons to why this may want to be done, but the most common reasons are to lock in a profit or remove risk ahead of a volatile event. In some ways it is comparable to an insurance premium.

For example, a trader holds a profitable long position on the Nikkei 225 (N225) on a Friday afternoon. They remain bullish on the trade but want to lock in profit over the weekend to protect themselves from an adverse weekend gap. They decide to open an equal weighted short position of the Nikkei 225 to hold over the weekend.

  • If the market opens higher on Monday: The hedged position (short trade) would be negative, yet the original profitable position would offset the short position as it has moved further into profit.
  • If the market opens lower on the Monday: The portable position (long trade) would have given back at least some of the profit, yet this loss would be offset by the hedged position (short) which would now be showing a profit.
  • If the market opens around the same level: The hedged position (short trade) would be around breakeven and the profitable position (long trade) would remain in profit.

If an equity investor holds a long-only portfolio of stocks, they could hedge out some market risk by shorting a relevant index. For example, if they hold of group of US technology stocks but were concerned of an upcoming risk event such as an election or earnings release, they could sell short the Nasdaq 100 Index (USTEC).

Indices are Highly liquid instruments
As trading volume for indices are high they’re considered to be highly liquid instruments, meaning they’re relatively easy to buy and sell. An example of an illiquid instrument is a house as it takes a long time to enter and exit the trade.

As technical analysis generally performs better on liquid instruments, this is good news for chart enthusiasts and index traders as indices tend to respect key levels more so than low liquidity stocks.

Why Trade Indices With FXTRADING.com?

  • Competitive Spreads
  • No commissions
  • Near 24-hour trading
  • Trade indices from North America, Europe and Asia
  • No dealing desk intervention
  • Hedging allowed
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Competitive Spreads
We pride ourselves on low transactional costs, starting with the spread.

No commissions
With no commission added to the trade, the only transaction cost is the tight spread.

Near 24-hour trading
Our index CFDs also trade outside of traditional exchange market hours, allowing you to choose your index of choice regardless of time zone.

Trade indices from North America, Europe and Asia
From Nasdaq tech stocks to Hong Kong’s HK50, we offer the indices that matter.

No Dealing Desk Intervention
By not interfering with your trades, don’t expect us to requote or add unnecessary delays to hamper your trading.

Hedging Allowed
A fully hedged position of equivalent size on the same market removes the margin requirement of your trade.

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