As its name is suggesting, index-based trading of contracts for difference or CFD is about speculating on the overall performance of the stock market or its sector. This is not the same as trading on shares. This is because the latter has more focus on the stocks of certain and single company rather than the market as a whole. Index, in contrary, refers to the market or sector that comprises of different companies. Hence, what this means is that it will be looking in to the performance of the sector rather than the performance of just a single company.
Among the most common indices where traders can make CFD positions include the FTSE 100, S&P 500 as well as Dow Jones and many more.
In making a position in this form of CFD trading, the trader agrees in exchanging the difference of the price of a certain index from one point or time to another period. In order to understand this, a person needs the basic knowledge on how contract for difference trading works.
With the foregoing, this form of trading means that there are buyers and sellers. The contract or agreement states that the seller will be paying the buyer for the difference. This difference is the disparity between the value of a certain asset at current prices and the contract price. If the said difference is, in contrary, negative; then it means that it would be the buyer needs to pay the seller instead.
Now, applying this to indices, a seller and buyer will have a contract or agreement. If a trader expects the S&P500 index to go down in the coming days, then the right position to take is a "short" position, which means to sell the position. This is because if traders expect it to de-valuate in the coming trading, then the wise investor would dispose it by selling it. However, on the other hand, there would also be some speculations that are in contrary to the former. Some would expect the index to appreciate in the coming days. In this instance, the best thing to do is to take a long position, which is to buy.
In this regard, why would a trader choose this instrument over the others when it comes to CFD trading? The answer to this is quite easy. This is because this instrument allows a trader to have an easy access to unfamiliar market. The best thing about this is that traders can do this without worrying too much on paying clearing fees. Aside from that, most of the main indices are basing on the blue chips, which is an appropriate measure of whatever the sentiments are in the current market. In other words, this means that a trader is primarily investing or positioning on the blue chips rather than a single share.
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