Unlike many other financial markets, stock indices don't provide an option for their physical exchange. It is simply not feasible as indices are made of dozens and hundreds of stocks. It also means that direct investment in indices is not possible – you can't buy them like shares. However, there are various financial instruments that mirror the performance of indices and can be traded and invested in. One good example of such financial instruments is derivatives.

With ThinkMarkets, you can trade stock market indices with derivatives called contracts for difference – CFDs. There are two types of CFDs – contracts on the current price and contracts on index futures. It may seem a little complicated, but all you need to do in both cases is speculate on price movements. In the first case, it’s the movement of a current price and in the second, the movement of a future price. If your prediction is correct – your trade is successful, and if the price moves in the opposite direction of your prediction, your trade incurs a loss.

If you are new to derivative trading, check out our CFD trading: a beginner’s guide where we explain what derivatives are and how CFD trading works in detail.

Keep in mind that brokers usually use different tickers to distinguish instruments. For example, on ThinkMarkets’ trading platforms, S&P 500 is marked as SPX 500 for CFD trades on the current price and ESH3 for CFD trades on the futures contracts.

How to trade indices with CFDs

Going long

Assume you were to place a trade on the SPX 500 index. The current price is USD 4,000.00, and you think it will go up. You open a long CFD position (buy), and the price goes up to USD 4,010.00. The USD 10 is your profit. If the price goes down to USD 3,990.00 instead, USD 10 is your loss.

Going short

In the opposite scenario, your prediction says the price will go down, and you place a short CFD trade (sell). If the price goes down to USD 3,990.00, as you predicted, USD 10 is your profit. If it goes up to USD 4,010.00 instead, USD 10 becomes your loss.

As you can see, it’s pretty straightforward. Now, let’s see the difference between trading CFDs on the current prices of indices and CFDs on index futures.

When you trade CFDs on the current price of a stock market index, it means your contract follows its real-time price, and you speculate on the current price as well. On the other hand, a CFD on the index futures contract means speculating on the index's price at a certain date in the future.

In both cases, trading indices with CFDs gives you extended trading hours, unlike some other types of trading. There is a simple explanation: while stocks are listed on the exchanges with fixed and limited opening hours, CFDs are not listed anywhere. As they only track the index's price, it remains set at its closing price while the exchanges are closed, making it available for trading. Once the exchanges are open again, the price is adjusted. You can find more info on the trading hours on the contract specifications page.

Whichever way of trading you choose, there are a few more terms you need to know to understand your index CFD trade better.

Points and ticks

The price movements in index trading are measured in points and ticks. A point refers to the smallest price movement on the left side of the decimal point. A tick, on the other hand, refers to the smallest price movement on the right side of it. The value of one point equals USD 1, and one tick is USD 0.01.

This terminology is not exclusive to stock indices and applies to all financial markets except forex, which measures price movements in pips. However, the values of a point and a tick vary depending on the market.

Spread

A spread in index trading, just like in any other financial market, means the difference between the buy (bid) and sell (ask) price. For example, on the image below, you can see that a spread of SPX 500 is 0.4 or 40 cents. Essentially a spread is the cost of any trade. That’s exactly why any new trade a trader opens starts at a loss – the spread amount gets deducted automatically and needs to be covered first before making a profit if the trade is successful.

Keep in mind that the placement of a decimal point is different in index trading and trading stocks. The same 40 cents spread in stock trading would be marked as 40.0.

Lots

A lot in trading represents a trade size, or in other words, the number of units of a financial instrument. This number is different for every financial market. In the stock market, one lot contains ten contracts or ten CFDs in our case. When you trade indices, there are usually minimum trade size requirements set by the broker. With ThinkMarkets, some indices can be traded only in full lots and some in mini lots – 0.1 of a full lot (1 CFD). You can find these details on the contract specifications page as well.

Leverage and margin

Trading indices with CFDs implies using leverage. It means traders borrow funds from a broker to open positions exceeding their account balance. To allow the utilisation of their funds, brokers require a deposit, called a margin. We explain both concepts in detail in the CFD trading: a beginner’s guide, too.

When you trade with leverage, you don't need to pay the full price to place a position, only the deposit (margin). The amount of the deposit depends on how big your leverage is – bigger leverage means a smaller deposit, and vice versa. The level of leverage varies depending on the market and instrument and is usually set by a broker for each specific stock market index.

Let's see how leverage works in index trading on the same example, where we placed a CFD trade at USD 4,000.00. If you open this trade with 200:1 leverage, you only need to pay 1/200th of the full amount, or USD 20.

That's the main benefit of trading indices with leverage – you can open a much bigger position with a smaller deposit. Your potential profit is also multiplied. However, if you incur a loss, it does get multiplied too. That's why it's crucial to use risk management tools like stop loss and take profit.

Understanding this basic information is crucial to a successful index trading journey. Once you are confident with fundamentals, you can move on to creating a sophisticated trading strategy. However, it is highly advisable to practise on a demo account first before trading with real money.

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How to trade indices

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