What is index trading?
Index trading is speculating on stock market indices like the FTSE 100, S&P 500, DAX, IBEX and the CAC.
It is one of the most popular types of day trading around the world. I like to think it’s a little more sophisticated than Forex trading and slightly easier than individual stocks for day trading.
As index trading is heavily influenced by a combination of the individual constituents of an index, overall economic data and self-fulfilling technical analysis there is a never ending supply of news, events and signals to trade from.
Major indices are also some of the most liquid tradable assets out there so no matter how big a trader you are your orders should always get filled.
Types of index trading
- Spread betting on indices – trades structured as a bet so no tax of profits
- CFD trading on indices – leveraged trading with a contract based on the opening and closing price of the trade
- Futures trading – trade with direct market access on exchanges like ICE, NYSE, NASDAQ and CBOE.
They all basically do the same thing, which is provide access to derivatives contracts of the underlying indices. If you want to buy and hold an index in the long run you are better off buying an ETF Index Tracker through your stock broker.
Index trading platform costs
There are two types of spreads on index trading. Fixed and variable.
Fixed means that the difference between the buy and sell price will always be the same. For example, the spreads on Wall Street at always 1 point, the DAX is 1 point and the S&P is 3 points.
Variable spreads mean that the difference between the buy and sell price will change depending on how liquid and volatile the market is. For example, around non-farm payrolls, the market will be more volatile and the best bid offer prices will not have as much liquidity. Therefore, the prices will be slightly further apart.
- Related guide: 50 rules for successful trading
For example here with IG, spreads on the FTSE are 1 point, 2.4 on the Dow and 0.6 on the S&P.
It’s a bit, swings and roundabouts really. You know where you are with fixed spreads, but with variable, during normal market trading you can get tighter prices, but they widen as the underlying market widens.
Most brokers offer competitive pricing on Index trading. But if you want to compare the most up to date pricing, go to our index broker comparison tables to compare spreads.
Spread betting and CFD trading on the major indices is risky.
Index trading liquidity
Second only to spread betting on FX, indices offer good liquidity, a decent intra-day range and pretty much 24 hour news flow.
The constant release of economic figures and leading indicators from overseas markets make them one of the most popular asset classes to trade worldwide.
Most popular indices for trading
- The German DAX – The DAX consists of the largest 30 listed companies on the German exchange and is one of the most popular indices to trade. It has a good dialy range and plenty of liquidity. Trading via spread betting and CFDs on MT4 is more popular now as the contract size on the futures contract is quite large. The margin alone for one contract is about EUR13,000 and the tick size is EUR25 per point. Using MT4, CFDs or spread betting means you can trade in a smaller size. It is also the first market to open in Europe which makes it a good indicator for the FTSE, and follows on from the US indices. For more information read our guide to trading and investing in the DAX 30 here
- The UK FTSE – The FTSE covers the top 100 companies in the UK and is generally regarded as the benchmark for the UK economy. It’s a good index, for jobbing in and out of all day. Because of copyright, some brokers call it the UK 100 or the UKX. It’s mainly traded via spread betting, CFDs and MT4 with brokers.
- DOW and S&P – The DOW is based on the top 30 industrial stocks in the US whilst the S&P focuses on around 500 of the biggest public companies. The S&P is one of the most heavily traded assets worldwide.
Trading the DAX, FTSE and DOW/S&P
Generally, the best spread bet brokers will be the ones that offer the tightest spreads. You need tight spreads with index spread betting as traders like to take quick profits on short-term intra-day positions.
But it’s not just about tight forex spreads, you also need a good balance sheet, added value, good charts, data and analysis to help make informed decisions.
Trading indices on MetaTrader 4
As well MT4 offering clients access to the Forex Markets it is also one of the best independent platforms our there for trading indices.
Index trading (second to FX) is one of the most heavily traded asset classes in the world. As with FOREX trading, the market is pretty much open all the time, there is great liquidity and news flow and there is plenty of money to be made (and lost!) from trend and chart trading.
Fortunately for traders, MT4 is offered by over 600 MetaTrader 4 brokers worldwide – but unfortunately, not all brokers are the same. So we’ve put together a top three brokers to open an MT4 account with. But first a little about the three main indices – we’ve left out the Asian indices because even though they are great markets to trade the most liquidity is when the UK is sleeping.
