Index CFDs

Index CFD is a financial derivative instrument that allows investors to earn profits by predicting the rise and fall of a certain stock index. The price of an Index CFD is calculated based on the real-time price of the underlying index, rather than the prices of the individual stocks included in the index. Traders of index CFDs do not need to actually own or take delivery of any shares, but only pay or receive the spread, which is the price difference between opening and closing a position.

Advantages of Index CFDs

The advantages of index CFDs are as follows:

Diversification

Index CFDs allow investors to track the performance of an entire market or industry in one transaction, without the need to buy or sell multiple stocks.

Flexibility

Index CFDs allow investors to trade in any direction and make profits whether the market is rising or falling. In addition, index CFDs can also manage risks and profits by setting stop loss and take profit. 

Leverage Effect

Index CFDs allow investors to control a larger market value by paying a certain percentage of margin, thus magnifying gains or losses. For example, if an investor wants to buy a $1,000 Dow Jones Industrial Average (DJIA) CFD contract and the margin rate is 5%, he only needs to pay a margin of $50 to open the position. If DJIA rises by 1%, his profit is $10, which is equivalent to a 20% return. However, if DJIA falls by 1%, then his loss is also $10, which is equivalent to a 20% loss rate.

Risks of Index CFDs

The disadvantages of index CFDs include the following:

Market Risk

The price of index CFDs is affected by the fluctuations of the underlying index. If there are drastic changes in the market, investors may be unable to close positions or make margin calls in a timely manner, thus facing greater risk of losses.

Swap Fee

Index CFD is a time-limited contract. If investors want to hold the position until the next trading day, they need to pay or receive a swap fee, which is a kind of overnight interest and will be charged based on the direction of the position. and swap rates. Swap fees may reduce investors' returns or increase investors' costs.

Spread Cost

Traders of index CFDs usually add or subtract a certain spread from the real-time price of the underlying index to calculate the price of opening and closing positions. This is how they make profits. Spread costs may affect investors' trading strategies and profit levels.

How to Trade Index CFDs

The trading process of index CFDs is as follows: 

1. Selection an Index

Investors can choose different indexes for trading based on their own preferences and analysis, such as the Dow Jones Industrial Average, Nasdaq 100 Index, S&P 500 Index in the United States, or the Euro Stoxx 50 Index and the German DAX Index in Europe. Or Asia’s Nikkei 225 Index, Hang Seng Index, etc. 

2. Determine the Direction

Investors can decide whether to buy or sell CFDs based on predictions of the future trend of the index. If investors think the index will rise, they can buy CFDs, which is called going long; if investors think the index will fall, they can sell CFDs, which is called shorting.

3. Open a Position

Investors can place opening orders through the online trading platform 12 or telephone 2 and pay the corresponding margin. When opening a position, investors need to pay attention to the following elements:

• Contract size: The contract size of each index CFD is fixed, usually 1 USD or 1 EUR per point, etc. For example, if an investor buys 10 Dow Jones Industrial Average Index (DJIA) CFD contracts, and the real-time price of DJIA is 30,000 points, then his opening market value is 10 x 30,000 x 1 = 300,000 US dollars.

• Margin rate: The margin rate for each index CFD is set by the trader and is usually a percentage, such as 5% or 10%. Margin rates reflect traders' assessment of the index's volatility and risk. For example, if an investor buys 10 Dow Jones Industrial Average Index (DJIA) CFDs, and the real-time price of DJIA is 30,000 points, and the margin rate is 5%, then the margin he needs to pay is 10 x 30,000 x 1 x 5% = $15,000.

• Opening price: The opening price is the market price when an investor executes an opening order, and usually includes the spread charged by the dealer. For example, if an investor buys 10 Dow Jones Industrial Average Index (DJIA) CFDs, and the real-time buying price of DJIA is 30,000 points, and the spread charged by the dealer is 2 points, then his opening price is 30,002 point.

4. Position

During the period of holding a position, investors need to pay attention to the following elements:

• Market changes: Market changes will affect the profit and loss of the position. If the market moves in line with the forecast, the position will generate profits; if the market moves contrary to the forecast, the position will generate losses. For example, if an investor buys 10 Dow Jones Industrial Average Index (DJIA) CFDs, and the opening price is 30,002 points, and if DJIA rises by 100 points, then his profit is 10 x 100 x 1 = $1,000; If DJIA falls by 100 points, his loss is 10 x 100 x 1 = $1,000.

• Swap Fees: If an investor holds a position until the next trading day, he or she will pay or receive a swap fee, which is a form of overnight interest that varies based on the direction of the position and the swap rate. Swap fees may reduce investors' returns or increase investors' costs. For example, if an investor buys 10 Dow Jones Industrial Average Index (DJIA) CFD contracts, and the opening price is 30002 points, if he holds the position until the next day, and the swap rate is 0.01%, then he The swap fee to be paid is 10 x 30002 x 1 x 0.01% = $30.002.

• Margin Changes: Because market changes can affect the value and risk of a position, traders may require investors to increase or decrease margin in order to maintain adequate margin levels. If an investor is unable to make a margin call in time, the trader may forcefully close his position, thereby ending the transaction and determining the final profit or loss. For example, if an investor buys 10 Dow Jones Industrial Average Index (DJIA) CFD contracts, and the opening price is 30,002 points, and the margin rate is 5%, then the margin he needs to pay is US$15,000. If DJIA falls by 500 points, then his loss is 10 x 500 x 1 = $5,000, and his margin level is reduced by 5,000 / 15,000 = 33.33%. If the trader requires the margin level to be maintained at at least 50%, then he needs to add an additional $2,500 in margin, otherwise the trader may forcefully close his position.

5. Close Position

When investors want to end the transaction and determine the final profit and loss, they need to close the position. When closing a position, investors need to pay attention to the following elements:

• Closing price: The closing price is the market price when investors execute closing orders, and usually also includes the spread charged by the dealer. For example, if an investor buys 10 Dow Jones Industrial Average (DJIA) CFDs, and the opening price is 30,002 points, if he wants to close the position, and the real-time selling price of DJIA is 30,100 points, and the trader The spread charged is 2 points, so his closing price is 30098 points.

• Profit and loss calculation: The profit and loss calculation is calculated based on the difference between the opening price and the closing price multiplied by the contract size and the number of trading lots, and needs to take into account swap fees and other expenses. For example, if an investor buys 10 Dow Jones Industrial Average Index (DJIA) CFD contracts, and the opening price is 30002 points, the closing price is 30098 points, and the swap fee is $30.002, then his profit is (30098 - 30002) x 10 x 1 - 30.002 = $959.998.