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Forex Basics

Trading CFDs with OctaFX

Being one of the fastest growing financial products on the market, Index CFDs present a unique opportunity to gain profit from the stock market fluctuations, along with providing high leverage and flexible trading schedule. In case you are already familiar with forex trading, you may find indices to be an interesting market to explore.

While being based on similar principles, index CFDs differ from currency trading in some aspects. Below you will find all the information you need to start trading CFDs.

What are Index CFDs?

By definition, an index is a statistical evaluation of how the price in a selection of stocks has changed over time that allows to assess overall performance of a certain market. Depending on the selection criteria, indices may be classified as national, global, industry or exchange based. Moreover, various calculation methods allow to subdivide them into price weighted stock indices, value (or market cap) weighted indices, and equally weighted stock indices.

  • A price weighted index is calculated by adding the price of each stock and dividing the result by the total number of stocks with more weight given to those that have a higher price, that is, the higher the price of a particular stock is, the more it will affect the index. One of the most popular price weighted indices is Dow Jones Industrial Average.

  • In value weighted indices, individual shares are weighted depending on market capitalization, that is, the larger market value of a company's outstanding shares is, the more influence on the index it has. NASDAQ and S&P 500 are examples of widely used value weighted indices.

  • All stocks an equal weighted index comprises of have the same impact regardless of market capitalization or prize. There are equally weighted versions for several popular indices, such as S&P 500.

As seen from the description, an index is basically a statistical value, which cannot be traded directly. However, it is possible to profit from index fluctuations through a derivative, a security which value is derived from an underlying asset. Derivatives can be either exchange based (e.g. futures and options) or over-the-counter (e.g. CFDs). The former are traded through an organised exchange while the latter are traded between two parties.

CFD stands for contract for difference and is basically an agreement to exchange the difference between entry and exit price. Trading CFDs does not involve buying or selling the underlying asset (for example, a share or a commodity), however their price reflects the movements of the asset.

What makes a CFD stand out from other derivatives is the ability to trade micro lots with relatively high leverage. For an individual trader it means that he or she can speculate on index prices and gain profit from price fluctuation with a small deposit and low risk involved.

How do I trade index CFDs?

The major stock market indices such as FTSE 100, Dow Jones, S&P and Germany's DAX index tend to respond well to technical analysis and are generally more preferred by short term traders. Other popular indices include France's CAC-40 and Japan's Nikkei 225.

Fundamentals-wise, it would mainly depend on the country the index originates from as well as the economic sectors it represents. Below you will find a brief description of the major indices we offer for trading.

The Dow Jones Industrial index

Symbol: US30
Trading hours: Monday - Friday, 01.00 - 23.15, 23.30 - 24.00
Thanks to the volatility of the US markets, the Dow Jones industrial index is one of the most popular instruments among the traders. Comprised of 30 major US companies, the Dow Jones provides a cross-section of the US economy and, consequently, is affected by the news releases from the region.

The Standard and Poor's 500 Index.

Symbol: SPX500
Trading hours: Monday - Friday, 01.00 - 23.15, 23.30 - 24.00
Another popular US index is the Standard & Poor’s 500 compiled from the share values of 500 largest companies in the United States. As it covers 70% of the stock's market, S&P500 can be considered a better benchmark of the US economy than the Dow Jones.

The Nasdaq 100 Index

Symbol: NAS100
Trading hours: Monday - Friday, 01.00 - 23.15, 23.30 - 24.00
The NASDAQ 100 index comprising of the 100 largest companies listed on the NASDAQ exchange reflects a number of industries including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. With the influence all these sectors have on the economy, one can expect the index to be significantly affected by the financial news from the US.

The ASX 200 Index

Symbol: AUS200
Trading hours: Monday-Friday, 02.50-9.30, 10.10-24.00
Based on the Sydney Futures Exchange (SFE) Share Price Index Futures contract, the Aussie 200 index measures the movement of various sectors of the Australian Stock market. Along with responding to economic news and reports from Australia, it is also affected by changes in commodity prices as the Australian Economy is highly dependent on them.

Nikkei 225 Index

Symbol: JPN225
Trading hours: Monday-Friday, 02.00-23.00
Often referred as to the Japanese Dow Jones equivalent, the Nikkei 225 is a stock index for the Tokyo Stock Exchanged comprising of Japan's top 225 companies, including Canon Inc., Sony Corporation and Toyota Motor Corporation. As the Japanese economy is highly export oriented, the index may be affected by some of the economic news from the US. 

Eurostoxx 50 Index

Symbol: EUSTX50
Trading hours: 9.00-23.00
The Euro Stoxx 50, designed by Stoxx Ltd, is a capitalisation weighted index made up of the largest companies across several industries, including SIEMENS, SAP, SANOFI, BAYER, BASF, etc. In total, the index covers 50 companies from 11 EU countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

DAX 30

Symbol: GER30
Trading hours: 9.00-23.00
Another popular capitalisation weighted index, the German DAX, is comprised of the top 30 companies trading on the Frankfurt Stock Exchange, including BASF, SAP, Bayer, Allianz, etc. It is commonly believed to be a good market with substantial volumes, as it tends to trend for several hours at a time with relatively small pullbacks. As all major stock indices, it normally responds well to technical analysis and is affected by economic news from Germany and the EU in general.

IBEX 35

Symbol: ESP35
Trading hours: 10.00-18.30
The IBEX 35, mapping the 35 most liquid Spanish stocks, is the benchmark stock market index of the Bolsa de Madrid. As a capitalisation weighted index, it is based on the free float method, which means that it counts the shares that are in the hands of public investors, as opposed to the restricted stocks held by company insiders. Some of the largest companies it consists of are BBVA, Banco Santander, Telefónica and Iberdrola, however, it is important to note that the list is reviewed and updated twice a year.

CAC 40

Symbol: FRA40
Trading hours: 9.00-23.00
Another European free float market capitalisation weighted index, the CAC 40 is the benchmark index of the stock market in France. It represents the top 40 stocks traded on the Euronext Paris stock market. As France represents about a fifth of the European Economy, it might provide an insight of where the European market is heading, as well as present an opportunity to profit from its own price fluctuations. The CAC 40 covers stocks across multiple industries, including pharmacology, banking and oil equipment.

FTSE 100 

Symbol: UK100
Trading hours: 9.00-23.00
Also called the footsie, the Financial Times Stock Exchange 100 is a market capitalization weighted index representing the top 100 blue chip companies on the London Stock Exchange. The index is said to map more than 80% of the total capitalization in the United Kingdom. Stocks are free-float weighted to ensure that only the investable opportunity set is included within the index. The FTSE group manages the Index, which in turn is a joint venture between the Financial Times and the London Stock Exchange.

How to start trading?

The first step is to open an MT5 Pro account with OctaFX, which offers all of the indices listed above, as well as 28 currency pairs, crude oil and metals. You will trade with no swaps and no commissions and low spreads.

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