Trading Indices: Matters Arising
Indices are a measure of the performance of a certain set of listed stocks in a stock exchange. In a previous article, we had classified indices and described what they represent. In this piece, we shall consider a few things that any trader wishing to trade indices as an asset may consider. These factors border on:
a) Trading Hours
b) Contract Specifications
c) Margin Requirements
d) Trade Process
List of Index Assets
The following index assets will be available for trading, depending on what the CFD broker offers and the location of the trader.
a) Dow (New York, US)
b) NASDAQ (US)
c) Standard & Poor’s 500 (S&P500; US)
d) DAX (Germany)
e) CAC40 (France)
f) FTSE100 (London, UK)
g) SSE180 (Shanghai, China)
h) Bombay SE (India)
i) Strait Times Index (Singapore)
j) ASX 200 (Australia)
k) Hang Seng (Hong Kong)
l) Nikkei 225 (Japan)
There are many others but these are the largest and most popular of the indices that may be traded on a forex or CFD platform.
Trading Hours
Indices are tradable assets because they undergo change from one day to another. Indices are usually open for trading during the hours that the underlying exchange opens for trading. It is therefore important for traders to know when the index asset that they will be trading opens for business. As an exercise, try to find out what the trading hours of the indices listed above are, and match them to your local time.
Contract Specifications
It is important to understand the contract specifications for the indices you want to trade. Contract specifications refer to the characteristics of the asset listing which will determine the size of a pip movement, monetary value of a pip, minimum trade volume, minimum incremental trade volume that can be applied when setting an order, leverage and margin requirements, and whether the contract is a full contract or a mini-contract.
See a sample of the contract specifications for the S&P500 index asset on a CFD broker’s platform:
This table alone shows the size of the contract for each index asset, margin requirements and payable commissions when a trade is entered or closed.
Trade Process
In order to trade, you need an account with a forex or CFD broker which offers indices for trading. After opening the account, the trader must fund the account appropriately. Margin requirements for index trading are very high; much higher than for forex. From the table, you can see that it takes at least $3,000 in margin to trade 1 lot of the Nikkei 225 index (#NKD). This gives an idea as to how much the account can be funded with. Some brokers offer mini indices, which are half contracts that require half the margin of full contracts for trading.
Indices are also subject to technical and fundamental analysis. The same fundamentals that move the underlying stocks of an exchange measured by the index asset, may also affect the index as well.
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