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The practice of trying to bet on the changes and movements of stocks is simplified by index trading, or stock index trading. The trader can bet on the movement of a stock index using a CFD, or contract for difference, and simply click a button to go long or short. The ability to add leverage to this financial instrument makes it one of the most popular strategies in the financial markets, whether it is used for hedging or pure speculation.
In order to reduce company-specific risks, index trading is a type of trading that focuses on a set of stocks. By speculating on the movement of a broader market by trading an index, the trader has built-in diversification. Because indices tend to move over much longer periods of time than individual stocks, index trading has become very popular over the past decade or so.
The most fundamental reason for the movement of the indices is the profitability of the listed companies. This is affected by indicators such as earnings per share, cash flow per share, dividends per share, and a long list of other indicators. Indices also fluctuate depending on the stage of the current business cycle and growth forecasts. Generally speaking, an index will perform better the better the economic forecast. However, if you are trading an index that tracks a particular nation, geopolitical issues may also come into play. In general, this is mostly a matter of "risk appetite" and the willingness of traders to risk their capital.
The index committees have certain requirements for the inclusion of company stocks. This can be done using parameters such as market capitalization, sector, location of incorporation or other similar parameters. Multiple criteria are often used, including market capitalization, industry, sector, and perhaps country of origin. Under established guidelines, the committee will meet regularly to review the validity of the list of companies that will remain in the index or be replaced. A company that ceases to meet the requirements for inclusion will either be replaced or given some time to come back into compliance.
Yes, but it takes effort. You need to be able to identify areas of supply and demand and, of course, understand market trends. The most important thing is to be aware of the relationship between risk and reward and to constantly seek more reward than risk.
Yes, regardless of what they reflect, all futures markets are derivatives.
If a trader owns index stocks, trading index futures ensures that he or she is protected in the event of a decline in index prices through the profits made in the futures market. This is often done by traders who want to hold a position in a stock for an extended period of time.
Brokers like Plus500 or XM provide leverage according to the regulations they are subject to or choose. They can provide up to x500 leverage.
Yes, you can always sell futures if you wish to close your position. It is quite common for traders to "take profits" long before the contract expires.