Index CFDs can track either the spot price of an underlying index or the index futures. In terms of chart and news analysis, spot prices are more accurate because they provide a quote for immediate buying and selling. Futures contracts get settled at a defined date in the future, so they may not react to events and conditions like spot prices. If you are interested in trading an index directly, CFDs tracking the spot market are the better choice.
An indices broker will offer leverage trading. Leverage allows you to open a larger position by borrowing additional capital from the broker. At TMGM, we offer 100:1 leverage on indices CFDs. This ratio means you can control $100 for every $1 you put into a position. You do not have to use the total leverage available. In fact, you should carefully calculate your sizing because all the money involved in the trade, including the leveraged capital, is your responsibility. You must return it to the broker after you close with no exceptions. Therefore, it is possible to lose more money than you have, leaving you with a debt to the broker.
Luckily, risk management strategies can help you avoid this scenario.
CFDs offer convenient access to global markets. Most markets have index ETFs for most major indices. However, CFDs are a cheaper alternative. ETF margin requirements are typically very high, and shares are more expensive. This makes it impossible to profit from short-term index price movements unless you have a lot of capital.
CFDs rely on leverage, but they are also better for those with limited capital because you only have to pay the difference between the price when you open and when you close the position.
For example, if you have an index CFD tracking the S&P 500 with an opening price of 3,600 and a closing price of 3,650, you earn 50 points in profit. If the index drops to 3,550, you owe 50 points. Though you need to cover the margin requirements if you use leverage, you do not have to purchase the CFD. You only need to cover the difference. This fact makes indices CFD trading much cheaper than ETFs.
With ETFs, you have to purchase the entire share. As you can see, CFDs are much better for taking advantage of small market moves than ETFs.
Frequently Ask Question
If you trade share CFDs, your analysis will focus on financial data and charts for one company. However, with indices CFD trading, you will look at the economy and the stock market as a whole.
Also, you can use leverage to increase the size of your position without having to contribute more capital. The capital requirements for indices CFD trading are much lower than those for trading index ETFs or futures.
CFDs also track the underlying index. Other derivatives, such as options on index ETFs or futures, do not mirror the price movements as closely due to expiration and time decay, market expectations, and other factors.
- Geopolitics can either inspire confidence in the markets or cause uncertainty. Treaty announcements, conflicts, international disagreements, and political changes can cause bear or bull markets depending on whether investors see the changes as positive or negative.
- Interest rate changes and other monetary policy decisions, which usually come from a central bank, can cause a country's stock market index prices to fluctuate.
- Government policies, such as trade deals and corporate tax rate changes, can affect stock market index performance. Generally, more pro-business decisions, such as lower tax rates or incentives for certain industries, cause index prices to rise. Meanwhile, tax increases, new regulations, and other factors slowing business processes can cause a drop in index value.