Share CFDs vs buying sharesThe same company, the same price movement, two completely different products. One makes you an owner. The other makes you a counterparty, with a nightly bill.Index trading explained
An index can close up on a day when most of its companies fell. That is not a glitch in the calculation - it is the calculation, and it is the thing worth understanding before you trade one.
An index measures a group of shares. The S&P 500 tracks around 500 large US companies; the FTSE 100 tracks 100 large London-listed ones; the ASX 200 tracks 200 in Australia.
You cannot buy an index. There is nothing to own - it is a calculation, updated continuously, with no issuer and no certificate. When somebody says they bought the S&P 500 they mean they bought a fund, an ETF or a derivative designed to track it.
For CFD traders that distinction matters twice over: you are trading a derivative of a calculation, two steps removed from any company.
Weighting: the thing that decides everything
How an index combines its members determines how it behaves, and there are three common methods that produce genuinely different instruments from the same companies.
Market-cap weighted gives bigger companies more influence. The S&P 500 works this way, adjusted for shares actually available to trade. A company worth three trillion dollars moves it enormously; one worth thirty billion barely registers.
Price weighted gives companies with higher share prices more influence, regardless of company size. The Dow Jones and the Nikkei 225 both work this way. A $10 move in a $500 share matters more than a $10 move in a $50 share, even if the second company is far larger.
Equal weighted gives every member the same starting influence. The same 500 companies, weighted equally, produce a visibly different chart from the standard version.
Five hundred companies does not mean each one has a fifth of a per cent of the say.
How an index rises on a bad day
This is the breadth problem, and it is the single most counter-intuitive thing about index trading. One session, one hundred companies.
The session ends
- Companies that fell
- 80
- Companies that rose
- 20
- Index close
- Higher
Four out of five members went down and the index went up.
Why
- The 20 that rose
- Include the largest constituents
- Their combined weight
- Larger than the 80 that fell
- Net effect on the calculation
- Positive
Nothing is broken. The index is doing exactly what its methodology says.
What the trader sees
- Headline
- "Market closes higher"
- The average holding
- Down
- Breadth
- Narrow: the move is concentrated
A narrow advance is a genuinely different market condition from a broad one, and the index level alone does not tell you which you are in.
Traders track this with breadth measures: advancing versus declining shares, or the proportion of members above a moving average. None of it predicts direction. It tells you how much of the market agrees with the headline.
Composition is why two indices react differently to the same news
A technology-heavy index and a resources-heavy index are both equity indices, and they can move in opposite directions on the same morning because they contain different businesses.
Rising interest rates tend to press hardest on companies whose value sits in profits expected far in the future - which is a technology-weighted index's problem more than a bank-weighted one's. A jump in iron ore helps a mining-heavy index and does nothing for a software-heavy one. A weaker pound can flatter an index full of companies earning their revenue abroad.
So before trading an index, know roughly what is in it. Not the full list - the sectors that dominate it.
Cash index CFDs and futures index CFDs
Most brokers offer both, often with near-identical names, and they cost money in completely different ways. This is the most common index-trading billing surprise.
Cash, or spot, index CFD
Tracks the underlying cash index or a derived fair value. No fixed expiry.
Spreads are usually tighter, which makes it the common choice for intraday trading.
Charges overnight financing every night the position stays open. Over weeks this accumulates and can quietly become the largest cost in the trade.
Dividend adjustments are applied separately when constituents go ex-dividend, so the mechanical drop in the index does not hand you a windfall or a loss.
Futures index CFD
Priced off a specific index futures contract, so it has an expiry date.
Spreads are typically wider than the cash equivalent.
No nightly financing charge in the same form, the financing economics are built into the futures price instead, which is a real cost, just an invisible one.
You have to manage the expiry: either close before it or roll into the next contract, which is its own transaction.
Which is cheaper depends entirely on how long you hold. Days: usually cash. Months: run the financing arithmetic before assuming.
Indices across our broker records
Of the three big non-forex markets, indices are the most universally offered, which means the choice is about contract terms rather than availability.
- 94of 100 brokers offer indicesMore than offer metals. Only forex itself is more widely available.
- 49also offer ETFsBarely half: so a broker with indices does not necessarily give you fund exposure too.
- 0standard contract sizeThere isn't one. Value per point is defined by each broker, and it varies.
That last figure is the practical one. A trade of "one lot" on the same index at two brokers can carry materially different exposure.
Sizing an index position
Index CFDs are usually quoted as a value per point, which makes the arithmetic unusually clean once you know the point value.
$200 of risk with a 40-point stop
- Maximum planned loss$200
- Entry5,000
- Stop4,960
- Stop distance5,000 − 4,96040 points
- Maximum value per point$200 ÷ 40$5 per point
Position size$5 per pointAt $10 per point the same 40-point move costs $400, not $200. The stop did not change. The position did.
Before trading an index
Half of these are about the contract rather than the market, which is where the avoidable losses are.
- Which index is this, and what are its three or four dominant sectors?
- Is it market-cap weighted or price weighted?
- Am I trading the cash version or the futures version?
- What is one point worth on this broker's contract?
- Is the underlying cash market open right now, or am I trading a derived out-of-hours price?
- Is a central bank decision, inflation print or major constituent's earnings due before I intend to close?
Common questions
Can I buy an index?
No. An index is a calculated value, not an asset. You buy funds or ETFs that track it, or trade derivatives linked to it.
Do I own shares with an index CFD?
No. You have a contract with the broker whose value follows the index. No shareholder rights, no voting, no dividends as a shareholder receives them.
Is one index point worth a dollar?
Only if the broker's contract says so. Point value is a contract specification and it differs between brokers and between indices.
Is the Nasdaq 100 a technology index?
Not officially. It is the 100 largest non-financial companies on Nasdaq, and technology happens to dominate that list. The distinction matters when a large non-tech constituent moves.
Why did the index rise when most shares fell?
Because the ones that rose carry more weight. In a market-cap-weighted index the largest few constituents can outweigh dozens of smaller ones.
Do index CFDs pay dividends?
Not as a shareholder receives them. When constituents go ex-dividend the index drops mechanically, and brokers apply a cash adjustment so that drop does not become an artificial profit for short positions or loss for long ones.
Does a broad index remove risk?
It removes most single-company risk, one fraud or profit warning is diluted by everything else. It removes none of the market risk. A broad decline takes the whole index down with it.
What is the VIX?
A measure of the volatility implied by S&P 500 options prices. It is widely called a fear index, which oversells it: it measures expected movement, not sentiment. More on that in what is volatility.
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Nothing here is financial advice. Leveraged products can lose more than they make.
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