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Best Indices Trading Brokers

Stock market operations are far from covering individual companies’ stocks only. Regardless of their level of proficiency, nowadays traders often include stock indices in their trading practice due to a considerable set of advantages they come with. But let’s first take a quick look at what indexes actually are.

In general, indices represent the cumulative value of a batch of stocks. Grouping can be either region-based or industry sector-based. Stock indices come in different volumes with the more constituents an index has, the more representative it is considered to be. Some of the most wide-embracing and at the same time popular indices are Dow Jones, S&P 500, Nikkei 225, and FTSE 100. As a matter of fact, DJIA (Dow Jones Industrial Average) includes the stocks of only 30 blue-chip companies but its fame is so immense that there was no way to skip it in our list.

Although there are several methods for calculating a stock index, two are the most commonly used.

Market capitalization weighted method – the constituent stocks are weighted according to their relative total capitalization on the market. This means the overall value of the index is influenced predominantly by the performance of the biggest companies it comprises.

Price weighted method – here the price of the individual stocks is decisive. The movement of such indices can be affected even by the smallest constituent company, for example, if its price dramatically goes up for some reason. That is why price-weighted indices are not considered truly indicative of the region’s economic state or the respective industry sector performance.

How Indices Trading Works for Traders and Brokers

Dow Jones tradingLong gone are the days when trading was an activity within the reach only of institutions and entities with huge capital. Currently, there are hundreds of online trading brokers whose range of services and instruments is so diverse that there is something for everybody interested in the field. The fact that brokerages often allow for commission-free types of accounts to be registered, contributes to the wide accessibility of the field.

What is characteristic of indices trading is that the buying and selling of a specific stock market index does not actually involve possessing a physical underlying asset. Rather, the task of traders is to speculate on the price of the particular index going up or down. If analyses show that a price is about to increase, traders will try to buy as soon as possible so that at a later stage they can take advantage of the resulting difference.

Since direct investment in stock indices is not possible, a number of derivative instruments have been created. Their availability in the portfolio of brokerage companies is not uniform, so always make quick research before joining a certain trading platform. Usually, the choice comes down to the following:

  • Contracts for difference (CFDs) – they enable trading the price movement of indices. In other words, these agreements are used by online traders to place bets on whether the relevant price will rise or fall.
  • Exchange-traded funds (ETFs) – ETFs resemble mutual funds that are traded just like stocks. Unlike mutual funds, however, the price of this basket of assets fluctuates throughout the day depending on the interest shown by buyers and sellers.
  • Indices options – Options enable buying or selling an underlying stock index for a preliminarily set period of time. Remember, this is a right, not an obligation. As an underlying asset of options, index futures are often used.

Top Indices Trading Brokers

choosing a brokerProfitable indices trading requires operating with a brokerage company that fits your educational needs, style of trading, and budget. Once you make sure that the broker you have chosen is fully regulated and authorized to operate in your country of residence, you should check a few crucial aspects of its work – spreads, fees, commissions, available trading platforms, supported payment solutions, etc.

If browsing through the multiple options currently available on the market is not your thing, you can take a look at the below selection of 10 reliable indices trading brokers and pick the one that meets your criteria.

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Indices Trading FAQ

1. Which is better to trade indices or stocks?

As with many other issues, there is no unambiguous answer to that question. It matters whether your priority in trading is the low level of risk or the quick large potential profits. Although stock indices are not 100% volatility-free, it is within this aspect they perform much better than individual stocks. An index cannot go bankrupt or be sued, for example.

2. Is an index with more constituents better for trading?

Here, it again matters how much risk you are willing and ready to take. If five companies from the S&P 500 index experience difficult times, this will probably cause a minor downward movement of the index price. However, if it is about a smaller index such as NL25, the influence of the same number of companies may be much more detrimental.

3. What affects the price of indices?

The principle of supply and demand is fully applicable in terms of index trading. If a lot of traders are buying stocks of the constituent companies of an index, its price will go up and vice versa. Interest in the individual stocks can be influenced by factors such as new products and services, shifts in the management, mergers, and overall state of the industry.

4. What is the difference between technical and fundamental analysis?

Both types of analysis represent a method for exploring the risks and benefits of long-term trading and as we know, one of the most suitable tools for this is precisely stock indexes. Fundamental analysts take into account all business aspects together with the local and global environment in general. Such an analysis is easier to perform in terms of industry-based indices. Technical analysis is of different nature. It is used to evaluate more tangible data such as returns and market trends for a particular time period.

5. How to minimize the risk of significant losses?

Despite the relatively low degree of volatility, index trading is not risk-free and losses are possible. It is for this reason that most trustworthy brokerage companies have integrated risk-management tools to help their users have a safe trading experience. We advise you not to skip that part of the brokers’ platforms and check if tools such as Stop Loss and Take Profit are available. And one general advice - never put your whole trading budget on one index only. Diversifying your funds will not only help you reduce risk, but also expose you to more opportunities.