You can trade indices using different timeframes. Index funds are an attractive long-term investment because, despite fluctuations, they offer a solid rate of return (around 10% annually) if you hold them for years or decades.
You can also use futures or indices CFD trading for short-term speculation. Even though most major indices move up in the long run, they experience significant drops and rises in shorter timeframes. Traders use price action and technical analysis or trade around news reports and economic announcements to take advantage of short-term movements.
You can also use index funds and derivatives for more advanced strategies. For example, some investors hedge their stocks or fund positions by taking the opposite side of the market with an index fund or CFD. If their primary investment falls in value, the hedge will cover part or all of the loss.
This flexibility in terms of strategies and purposes is an attractive aspect of indices CFD trading.
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.