What are indices? How do you trade them?
Index trading refers to the buying and selling of specific financial instruments that are connected to stock market indices that monitor the performance of asset groups based on various factors, such as industry, sector, country, or growth rate.
Index trading is frequently thought of as a way to access the financial markets without directly purchasing stocks, commodities, or bonds of a company. Those who are new to trading typically start with index trading to get a sense of how trading markets work. They invest in a basket of stocks rather than focusing on individual stocks of specific companies.
It teaches newcomers about the rise and fall of stock prices while also providing exposure to a diverse market. Every stock market in the world will have a financial index attached to it, and this index more or less acts as a benchmark that reflects the overall performance of the market. The movement of this index can particularly indicate the health of the economy in question.
How are stock market indices calculated?
Most of the stock market indices are calculated based on the market capitalization of the component companies, but there are other popular indices that are calculated on price weights, like the Dow Jones Industrial Average (DJIA).
The market capitalization indices give more prominence to the larger cap companies, which means that their performance will have a greater effect on the index than that of the lower cap companies. Market capitalization is calculated by the current market price of shares multiplied by the number of outstanding shares. It is calculated upon the floating shares that are publicly available for trading.
Price-weighted indices give more weight to higher share price tags, rather than the size of the company. There are far fewer indexes that are based on a price-weighted index.
The unweighted index or equal weight index gives the same weight to all of the constituent companies in the index. This limited the influence of a particular constituent company will have on the index and through it brings down any particular effect a spike in prices of a share of a company. The S&P 500 Equal Weight Index (EWI) is an equal-weight version of the S&P 500.
The most traded indices are DJIA (Wall Street), DAX (Germany 40), NASDAQ 100 (US Tech 100), S&P 500 (US 500) and FTSE 100.
With the diverse markets opening up in the UAE, Index trading in the UAE is one such avenue people are venturing into to make more worthwhile investments. And in the UAE, Indices trading in Dubai has garnered more attention than in the other Emirates.
How do you trade in indices?
- There are four main ways in which traders can introduce indexes into their portfolios. Seven Capitals helps the traders that come to them to understand these different aspects and help them start index trading in Dubai.
1. Cash Indices
If the traders are looking to speculate in the short-term, then the best way is to trade in cash indices intra-day. They have tighter spreads when compared to the other components in index trading. Cash indices are traded in spot prices which basically means that if you are buying now, then you have to pay up at the very moment. Spot price is immediate delivery of the contract. There can be additional overnight charges so most traders close the positions at the end of the day.
2. Index Futures and Options
Index futures and options are mainly considered if the trader has a long-term outlook as they have wider spreads. But these will still have overnight charges included in them. They are worked through within the futures price, which means that traders agree to deliver the contract in the future. You can either roll them in for cash or withhold them for a long period of time in the future.
Exchange Trade Funds, or ETFs, is a very clear way through which newcomers in trading can gain a better understanding of index trading in the UAE. ETFs invest in assets that are components of the index and also state the index that they are considering as a benchmark and compare the performance of the index based on this benchmark.
CFDs or Contracts of Differences are an ideal gateway to start with index trading. It helps in understanding the speculations that happen with index trading. CFDs are a contract between the trader and broker to exchange the difference in price at the time of opening of the contract to the time it is closed. It is purely in the disposition of the trader whether to go short or to go long.
- Now that you have a clear idea on the three different ways in which you can do index trading in Dubai, the next step will be to open an account with us, Seven Capitals to start with your index trading in the UAE.
- Go ahead and select the indexes that best suit the trading strategy you have planned. The choice of index will be purely based on the risk you are willing to take, the position with which you intend to trade, and the capital that is available to invest. Seven capitals give you the opportunity to trade 20+ CFD indices globally within the indices trading in Dubai.
- Going forward, the decision to go long or short with the indices fairly depends on the calculations that you have. Traders go long when they think that prices have fairly great chances to increase in the future and they go short when the chances are that the prices may fall.
- Setting stops and limits are indeed important while doing indices trading in UAE. Stop order closes your position automatically if the market prices go beyond an unfavorable level and a limit order is either to buy a stock at a designated maximum price or to sell at a predetermined minimum price.
- When you are ready, you can now go ahead and choose the market you are planning to trade on the Seven Capital trading platform.
Making sure to understand the terminologies and how each of the terms serves an important role in trading strategy is the first and foremost step to know before doing index trading in the UAE. With the assisted guidance of Seven Capital, the entire process of trading will seem easier to comprehend and can help you make good returns.