How to Choose Best Indices Brokers

What is a Stock Market Index?

Simply speaking a stock market index is the measure of an established segment of the stock market and it is normally used by investors as a gauge to build a portfolio. One top example of index is the FTSE 100 that is created by the biggest 100 companies listed in the London Stock Exchange: it provides a measure for the UK markets. The DAX index is the German one and is made up of 30 best companies on the Frankfurt Exchange.

How is determined the value of an index?

The value of an index is made by the combined prices or combined capitalisation of stocks within that index. It can be either a price weighted average or a market average of all the stocks that form the index. You need to think that the index is just a tracker of the overall performance of a particular part of the market and give a good indication of how well things are going at any given time.

What are the most traded Stock Market Indices?

There are many stock market indices but only few are the most popular and are traded regularly across the financial markets. Below you will find a list of those indices:

  • The Dow Jones Industrial Average (The Dow) – this index is created by the top 30 companies in the USA that have been picked because of their size and/or influence. The Dow Jones value is the weighted average of the prices of those 30 companies stocks. Those companies represent around the 25% of the US stock market.
  • The S&P 500 Index – This index represents a portfolio of 80% of the US stock market and it gives a very good measure of how the entire stock market is performing.
  • The Wilshire 5000 index – This includes nearly every publicly-traded company that have their HQ in the United States. As you can understand this covers nearly the ‘total market’ and it is often called the ‘total market’ index.
  • The Nasdaq Composite Index – This index is made only of technology stocks. The value is market-weighted and it does include all the stocks that are traded on the Nasdaq stock exchange.

What are the Advantages and Disadvantages of Trading Indices Through CFD Trading Brokers?

Normally stock market indices are traded with CFD brokers. This allow the trader to make a profit or a loss depending on the performance of the index. A trader can purchase a number of contracts with a smaller account size instead of purchase each individual stock included in the index.

DFC brokers normally allow to trade indices like the London Capital Group with margins as low as 0.20%. A trader will also be able to buy and sell contracts and many are trying to profit regardless of how the market is moving. Another good advantage of trading indices with a CDF broker is that normally they do not charge a commission on the trades: the broker will make the profit directly from the spread.

The coin in this case tough has two faces as traders who decide to take advantage of the margin offered by brokers will have a bigger advantage if the trade will go in favour of the trader but it will incur in higher losses if the trade will go against them. It is very important not to trade more than you can afford as with this type of agreement they could lose 100% or even more of their original investment. So in conclusion a stock market index can be traded with CFD trading brokers with the advantage that you can get higher returns but also higher risks.