Contract for differences (CFDs) are great way of speculating on the world financial markets. They are cost effective, easy to trade via Internet and pretty much straightforward instruments. Initially those were invented for large institutional investors, but nowadays are widely spread over the world. With the use of leverage they become even more accessible as everyone can easily start trading with as little as $100.
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CFDs can be based on various instruments such as currency pairs, shares, commodities and many more. One of the underlying instruments they are based on is the stock market index. A stock index is a portfolio of shares of individual companies combined together and forming a price. Having a portfolio of shares has numerous advantages among which diversify your risk.
In reality the index itself cannot be traded as an instruments. Rather there are financial instruments based on indexes such as index futures or contract for differences on indexes. In either of the cases, the index can bring profit or loss depending on whether the price direction went into the desired direction. Many brokers and investment firms offer this type of trading and some cfd index trading conditions are quite cost effective. With a margin of 1% as shown on the page of the previous link, investors can buy an index priced at 12000 USD with just 120 USD available in the account. This is also called leverage and it means that you can increase your purchase power.
Keep in touch with Indexes?
This is quite easy because all major news cite indexes all the time. The truth is that the indexes are like benchmarks for the economy of a country. The best way is to always be in touch with major websites such as reuters.com and look into the trading section. A good source is also Google and yahoo finance. For instance, I prefer to always check Google finance for US indexes and aastocks.com for the Asian index Hang Seng. In all cases, you must be always in touch with the fundamental news as well as with the technical analysis.
Types of indexes
Stock exchange indexes can be classified in many ways. For example, major or global indexes comprise large well-known companies (Apple, IBM, etc.) and are traded worldwide via futures and CFDs. It is a common practice these indexes to dictate other markets over which they usually don’t have any influence. Such indexes are DAX for the European Union and Dow Jones for the USA.
National indexes are another type of market indexes and they represent the state of a current economy by including only national companies. Examples are S&P 500 for the US economy and Nikkei for the Japanese one.
Another type of indexes is those tracking a specific sector of the market. For example an index may include only car producing companies.
How to trade Indexes?
To trade indexes you have to open an account with a broker offering such instruments. First of all it is better to open a demo trading account in order to check your strategy and see if it works. You can profit from either rising or falling markets. For instance, if you think that the EU economy is going down (which is a common trend lately) you can place a short order on one of the major indexes such as IBEX – the Spanish index. On the other hand you can place a long order if you think otherwise. When you open a live account make sure that you won’t risk money that you cannot afford to lose.
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