What is index trading and how does it work?

Learn everything you need to know about index trading and discover the top global stock market indices.

Firstly, what are indices?

An index is a way to measure the performance of a group of assets, in this case a list of publicly traded companies and their stock prices. 

One of the top performing and most widely known indices in the world is the Dow Jones. The Dow Jones Industrial Average (DJIA) tracks the overall performance of the 30 largest companies in the US. If the average price of the 30 companies goes up, the DJIA climbs higher as well. If the average price of the 30 companies drops lower, the DJIA will decline too.

What is index trading?

Index trading is defined as the buying and selling of a specific stock market index. Investors will speculate on the price of an index rising or falling which then determines whether they will be buying or selling. Since an index represents the performance of a group of stocks, you will not be buying any actual underlying stock, but rather buying the average performance of the group of stocks.  When the price of shares for the companies within an index go up, the value of the index increases. If the price instead falls, the value of the index will drop. 

When you trade indices online, there are two main types: index cash CFDs and index futures CFDs. The main difference between the ‘cash’ market and ‘futures’ market is that the ‘cash’ does not have an expiry date. The ‘futures’ market, however, has an expiry date, normally known as a ‘rollover’. A futures contract is effectively an agreement between the buyer and the seller on the price that has to be paid by the buyer at a given future date.

 

How are stock market indices calculated?

Start Trading Indices

In the digital era, calculating the stock market indices prices has become easier, using methods like market capitalisation and the price weighting formula, as shown here:

The more commonly used method is market capitalisation, which refers to how much a company’s stock is worth by total dollar market value.

To find this value, multiply the number of outstanding shares by the current market value of a single share from the company. Using this method gives greater weighting to organisations with higher share prices, meaning that changes in their values will have a larger effect on the current price of the stock index it’s a part of.

What are the major world indices?

Here are some of the most popular indices in the world. Many of them include blue-chip stocks. Blue-chip can be defined as a well-established company with a market cap in the billions and considered a market leader.

  • Dow Jones Industrial Average - DJIA
  • S&P 500
  • EURO STOXX 50
  • Nasdaq 100
  • FTSE 100
  • DAX 30
  • CAC 40
  • Nikkei 225
  • Hang Seng
  • ASX 200

What moves index market prices?

The movement of index prices is primarily dependent on external forces. The price will generally decrease in times of uncertainty that bring weakness to the relevant country's economy. Some factors that can impact the price of an index include:

Commodities

Some stocks within an index may be commodity stocks, with any fluctuations in the market having the potential to affect the index price.

Global news

Events such as natural disasters or pandemics would negatively impact an index market by affecting the impacted country’s economy.

Economic news

Economic events and meetings such as central bank rate decisions, NFPs, trade agreements and employment indicators.

Index reshuffle

When a company's stock is added or removed from a stock index, the prices can see a shift.

Company news

Important company news, such as new leadership, a merger or release of financial results.

Benefits of index trading

There are several reasons that stock indexes have been popular amongst beginner traders and experienced investors for many years:

Go long or short

The ability to go 'long' or 'short' means that you can take advantage of stock indices prices falling or rising.

One trading account

You need just one trading account to access multiple indices from all over the world, including: ASX 200, Dow Jones, Hang Seng, Nikkei 225, and DAX 30.

Index reshuffling

Indices can change, removing a company's stock that has been performing badly or including a new stock that has seen significant growth.

Less capital needed

Very little capital is required o to start index trading Index CFDs exclude the disadvantage of having brokerage fees and commissions on standard accounts. Additionally, the margin required to open up a position is as low as 1%.

What ways can you trade stock market indices?

At Axi, indices are traded as CFDs (Contract For Difference). This means you don’t take ownership of any asset, but simply trade the price movements. For example, if you are the buyer, you agree to pay the seller the difference between the current value of the asset and the value when the contract expires. Find out more about how to trade indices

There are two main types of indices you can trade with Axi:

Index Cash CFDs

Featuring tighter spreads based on spot pricing, cash indices are generally considered short-term investments. Cash CFD traders tend to avoid holding positions overnight in order to avoid paying overnight trade charges, and will reopen trades the next day.

Index Futures CFDs

With a contract based on a price for future delivery, Index Futures CFD trades are generally preferred by traders interested in medium to long-term investments. This is due to the fact that this type of trade does not incur overnight funding or swap charges.

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Index trading FAQs

Indices can be traded as soon as the stock market opens. The general trading hours for the US stock market is as follows:

  • Pre-Market Trading Hours: 4:00 AM to 9:30 P.M ET
  • Regular Trading Hours: 9:30 AM to 4:00 PM ET
  • After Hour Trading: 4:00 to 8:00 PM ET

Refer to our product schedule to see all indices open and close hours.

A current and complete list of indices can be found in the product schedule. As a reference, some of the most popular indices you can trade with Axi are:

  • France 40 Index
  • German 30
  • UK FTSE
  • US S&P 500
  • DOW 30
  • ASX S&P 200
  • JAPAN 225
  • Hang Seng
  • Nasdaq 100
  • China A50
  • Euro Stoxx 50

The margin requirement for our equity indices starts from as low as 0.5%. Tick sizes are variable, as outlined in the product schedule.

Tick values on indices is the minimum price fluctuation established by an exchange. Tick sizes are mentioned in the ‘contract specifications’ set by futures exchanges and are calibrated to ensure liquid, efficient markets through a tick bid-ask spread.

Several factors determine whether index trading could be profitable for you or not. Moreover, profits from trading also vary based on the market conditions. When markets are volatile, price moves are bigger, thus, the potential for profit or losses is higher.

Though long-term investors, like pension funds, track them closely, short-term CFD traders simply tend to speculate on indices. If you are keen to kickstart your journey trading indices, these are some of the more popular indices to consider:

  • Dow Jones Industrials Average (US 30)
  • Standard & Poor’s 500 (S&P 500)
  • Nasdaq (Composite and Nasdaq 100)
  • Dow Jones Industrials (DJIA)
  • UK FTSE 100 (FTSE 100)
  • DAX (Germany 30)
  • Euro Stoxx 50 (Euro 50)

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