Immediately after trading personal equities, retail traders are generally prone to experiment in their trading indices. What therefore is an equity index and how are they priced and what are they actually trading?
To put it in much simpler terms, an equity index is a benchmark value of a tub of stocks. Each index will clearly identify what it is made of and the manner on how it is calculated. The most renowned equity indices receive substantial exposure to the media more specifically, when they are simply summarised in a nation’s economy or a recession in the market.
Trading indices in general as an entire whole slightly than individual equities lets a trader predict on the probability of the whole benchmark per se. Equity indices give traders a wider representation of the group of companies therefore reduces the risks of trading individual companies. By trading global equity indices, traders are able to geographically expand their portfolio and possibly gain profit from international growth or reduction. Major indices are more commonly used as the benchmark to gauge the performance of portfolios.
The organisational basis
Plenty of retail traders do not fathom the circumstance that you simply cannot trade the cash price you frequently see in the online source since it is simply a calculated benchmark; therefore trading is frequently done using derivatives. These are usually based on futures or over-the-counter derivatives such as CFDs. It is therefore important to consider that when trading equity indices, it is not entirely possible to take ownership of the principal assets.
Not all CFD products are similar, the biggest disparity is attributed whether the CFD is based on an underlying future, or the cash index of which may be internally priced if traded through a market manufacturer.
It is likely possible to trade equity indices when the cash market is closed because of the market’s futures being open at the same time the eagerness of market makers to internally quote a product. As with many individual traders having other obligations, this proves to be highly convenient. As an example, a market maker may quote a price of its FTSE 100 cash overnight by following the S&P 500’s volatility. CFDs are traded on margin such as 1.5 % of the total value and this proves to be very economical to broaden portfolio profiles and gain additional coverage to a group of equities. On the other hand, if you are paying a funding fee then any positions that are held long term will most likely lead to profits eaten because of the high leverage which incurs at a relatively high amount from the market maker.
Gaps in the market are always an issue when trading cash equities since it is very probable to view a large market gap on the opening of an index. This is generally viewed within the European markets after a large directional shift in the United States or in Asian sessions.