Trading Index CFDs

How to Trade Index CFDs on the World's Markets

Index CFDs or Contracts for Difference are one of the fastest growing financial products on the market today. They provide CFD traders the opportunity to trade all of the world's stock market indices from the one platform whilst gaining access to incredible levels of CFD leverage.

What is an Index CFD?

Index CFDs are simply a mirror of the underlying index, such as the SPI 200 index or the S&P 500, but traded as a Contract for Difference (CFD). As a general rule the only other way to get access to the indices around the world would be to have a futures trading account and you'd trade the indices via the relevant exchanges. For example you'd trade the Aussie SPI 200 index through the Sydney Futures Exchange and the Nasdaq through the Chicago Mercantile Exchange (CME)

What Indices can I trade using Contracts for Difference?

The range of Index CFDs you can trade are numerous and the reality is you only have to stick to the major indices if you like. The major CFD Indices are:

• Nasdaq Composite
• S&P 500 index
• Dow Jones Industrial Average
• Aussie 200 index
• FTSE

Other world indices include:

• Nikkei 225
• Hang Seng
• Dax (Germany)
• CAC 40 (France)

Most CFD brokers allow you the opportunity to trade any of the world wide Indices at $1 per point, which is a huge advantage when you are starting out. The reason for this is because you get to effectively test your CFD trading strategy for the lowest possible price thereby keeping your risk low. If you approach it properly you should be able to dramatically increase your trading confidence for the smallest possible outlay.

Access to incredible levels of leverage

One of the primary reasons traders get excited about Index CFDs is due to the high levels of CFD leverage you get access to. Many CFD brokers both in Australia and the UK allow you to trade the Index CFDs with as little as 1% margin. This means a $1,000 outlay will control a $100,000 position. Taking it one step further a $10,000 outlay will control a $1 million dollar position. At this stage many people consider that trading these products or even FX CFDs is risky but you may be wrong.

Controlling the leverage on your account

When trading index CFDs it is true you get access to incredible amounts of leverage and many people mistakenly refer to this as a risky product. In fact the product itself isn't risky but instead the way a trader uses that leverage can potentially be risky. A conservative trader with a $10,000 account might use no leverage at all and trade a total position that does not exceed $10,000. In this instance the trader has no more risk than a typical share trader. In fact they have less risk because it is impossible for an index to go to zero whereas stocks go to zero and get delisted regularly.

Alternatively a trader could trade at 10 times leverage or use their $10,000 to control a $100,000 index CFD position. It is at these extreme levels of leverage that traders get into trouble. Following such a high level of leverage is always huge wins and huge losses so tread cautiously.

Commission Free Index CFD Trading

Another massive selling point and probably the biggest marketing advantage for each of the CFD brokers is the ability to trade all of the Index CFDs commission free. Well in fact there is no brokerage but you do get charged the spread.

What is the spread?

The spread is the difference between the first buyer and the first seller or what we refer to as the first bid and the first ask price as you can see below.

You will notice that the difference is 2 points between the bid and the ask price. If you bought 1 contract at 4802 and wanted to sell it straight away you would lose $2. So in effect you are paying some sort of fee but it's not brokerage. It's classed as paying the bid ask spread. In actual fact this style of trading is very common and the largest market in the world (Foreign Exchange Market) has employed this strategy for decades.

Are Index CFDs a great trading product?

As you can see we have touched on the main advantages and key reasons behind traders wanting to get started trading Index CFDs. As with any financial product, do your due diligence and determine if this product is for you.

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Disclaimer: Trading Contracts for Difference carry risk where you can lose more than what you start with. View our full disclaimer here.

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