Index Trading with TigerWit

Equity or stock indices are some of the most popular instruments among margin traders and TigerWit offers its clients access to trading in a range of CFDs on leading equity indices many of which are available for trading 24 hours per day 5 days per week. 

A stock index is a measure of the performance of a group of individual stocks or equities and it acts as a barometer of stock market performance and market sentiment. Which traders can gauge by looking at the value of and degree change in an index, rather than having to look at dozens of individual share prices.

All stock exchanges have at least one benchmark index which will be made up of the leading shares listed and trading on that exchange. For example, the FTSE 100 (or UK100) index is the benchmark for the performance of the companies listed on the London Stock Exchange, and as the name suggests the index is made up of the top 100 largest UK stocks trading on the exchange. 

The FTSE 100 index was created back in 1984 when the prices of the top 100 UK stocks and the number of shares that they had in issue, were recorded and rebased to an index level of 1000 points, the index starting value.

That same calculation is now carried out every second of the trading day to track and generate the changes in the prices of individual companies in the index and their market capitalisation (price x number of shares outstanding). Which, when combined together generate the changes in the overall index value. Since its inception, the FTSE 100 index has grown in value by more than seven times.

As we noted earlier an equity index is a barometer for trader sentiment, however, they were not initially tradable in their own right. However, some very clever financial innovation changed all that. 

CFDs or Contracts for Difference are any financial contracts that are settled for cash, rather than by the delivery of the underlying instruments that the contracts are over. As such they are ideally suited to use by traders who are interested in speculating or trading on price changes, rather than outright ownership of the stocks, commodities and bonds etc., that these contracts may be over. 

Contracts for Difference came about in the early1980’s when futures contracts were introduced for trading on US stock indices. The exchanges that introduced these contracts realised that market participants trading these contracts did not want the inconvenience of having to make or take delivery of the individual stocks that made up these indices, which in the case of the US S&P index was 500 separate companies.

Instead, it was far more practical and efficient for users to pay away or receive money based on the performance of the trading positions they held in contracts over those indices.

Exchange-based index futures became immensely popular, but they had limitations. Futures contracts on indices have fixed expiry dates and contract sizes, and they were designed for trading by the institutional market rather than retail traders. 

However by the late 1990s, it was realised that these contracts over indices didn't have to trade on an exchange, instead, they could be traded OTC or Over The Counter and what’s more that these contracts didn't need to be traded in rigid sizes, with fixed expiry dates and contract lifetimes either.

Rather they could be traded on a leveraged basis, as open-ended contracts, that were financed through the use of rollover swaps, in just the same way that trading in margin FX was conducted. Joining those dots created one of the most flexible trading products we have ever seen. 

Because CFDs offer cash-settled trading, that is the counterparties to a trade, the buyer and seller, agree to pay each other the monetary differential resulting from their trade, it meant that traders could take long or short positions in equity indices with equal ease.

When you trade equity indices using CFDs you never own the underlying index or the companies within it, instead, you are speculating on the rise and fall in the index value. 

Because major equity indices capture price changes for all their constituent companies, which are often the largest companies in that country or region. They have become the barometer for market and trading sentiment. 

The link to market sentiment is reinforced by the fact that traders can gain immediate exposure to all of the companies/stocks within the equity index through one CFD trade rather than having to process 30, 50,100 or even 500 separate orders for the shares of the individual constituent companies. 

Instant asset allocation such as this means that equity index CFDs are sensitive to both macro data such as unemployment, GDP, inflation and interest rates changes etc. As well as microdata, for example, earnings reports and updates from the constituent stocks that make up the index. 

That means there is usually something going in the index and that the prices of equity index CFDs are rarely static. Of course, if indices are quiet in Europe, then traders can look to trade equity indices in the US or Asia. By trading equity Index CFDs you can gain exposure to the performance of the constituent companies within the index. 

 Equities and equity indices are seen as risk assets when compared to safe havens such as government bonds or currencies like the US dollar, Swiss franc and Japanese yen. These days markets are often said to swing from being in a Risk-off mood to a Risk-on mood.

When markets are Risk-off then equities and equity indices are out of favour and money moves out of these instruments and into safe havens. In these circumstances equity index prices typically fall as supply (sellers of these assets) outweighs demand (buyers of these assets). 

However, when markets are Risk-on the reverse is true money typically moves out of safe havens in Risk-on markets, and back into equity indices and other risk investments and that means that the prices of equity indices are likely to rise in value as demand (buyers of these assets) outweighs the supply (sellers of these assets).

 When we see changes in the prices of equity indices or any other financial instruments, what we are really seeing is the market attempting to find a new level at which business can be conducted. That is a price at which buyers and sellers (or supply and demand) are happy to trade. 

Prices move upward or downward to find that new equilibrium level depending on whether the move in price is driven by excess supply or excess demand.  

In deep liquid markets, this new price level is often found quickly and perhaps without too much movement in underlying prices. However when markets get out of kilter, for example when sentiment changes or new information becomes available then buyers or sellers may withdraw from the market creating an imbalance. At which point prices can move sharply and these are the kind of moves that equity index CFD traders are looking for.

CFDs on indices are traded on margin that means that your broker leverages or gears up your trading deposit to allow you to control a much large position in the markets than you otherwise be able to afford. Margin or Leveraged trading can be a very powerful tool for traders as it can greatly magnify trading profits however it can magnify trading losses just as easily. As such traders need to respect and understand the leverage or gearing, they in their indices trading.

The best method to use to get to know equity indices trading using CFDs is to trade them in the experience account. In that way you can become familiar with the way that they move, the size of the position that's best suited to your account and the best way for you to trade them within an accurate simulation of real markets but without risking any real money. 

Once your confident you have found your feet and you know what you are doing, then you can join thousands of traders, across the globe, who are regularly trading equity index CFDs in the live markets.