Trading has become more accessible to traders from all around the world than it used to be in the past – today, traders can access a range of assets and securities. The indices and forex market can be used to place financial trades, we provide an overview of both markets below.
What is index trading?
Indices act as baskets of stocks, with their price calculated based on the price of each individual stock that makes them up. Most of the world’s most popular indices like the MSCI World Index, the FTSE All-World Index, or the Dow Jones Global Titans 50, bring together the most successful and quickest-growing companies from all around the globe, creating strong stocks for traders to make profits on.
You can find global, regional, national, industry-based, and even currency-based indices, like the FTSE Euro 100 Index for Europe or the regular FTSE 100 Index for the United Kingdom alone. Index trading is one of the least manipulative financial instruments, since no single entity can impact the price of an entire index on a large scale.
Most traders use spread betting and CFDs for trading indices, along with options, futures, and other derivative financial instruments. Leveraged trading allows traders to access positions that are valued higher than the required deposit, increasing potential profits, but also increasing the risks. Remember the risks involved – leveraged trading and speculating on index price movements requires proper market researchbefore you start trading, carefully plan out your strategy and make use of features such as a stop loss order.
What is forex trading?
While index trading deals with stock baskets, forex traders exchange world currencies instead. The currencies on the foreign exchange market are waged against each other, creating currency pairs that traders can speculate on. Some of the most popular currency pairs include EUR/USD, GBP/USD, USD/JPY, and USD/CHF. These pairs offer the highest volume, and while the forex market usually offers very high liquidity, some more exotic pairs might still be a bit harder to sell.
In most cases, traders will require a forex trading platform like MetaTrader 4 to trade forex. These platforms offer access to derivative financial instruments, accessible from desktop and mobile. These platforms feature additional educational material and knowledge bases, filled with helpful material for beginner and advanced traders alike to improve their strategy and minimize risk.
How do indices compare to forex?
Indices often feature a smaller available leverage for derivative trading, usually up to 1:20. When it comes to forex, the leverage can go all the way up to 1:500. Both markets require a risk management strategy to avoid losses, but the higher the leverage, the bigger the potential losses. Both markets also offer very high liquidity, making closing and opening orders faster and reducing the possibility of slippage.
Trading portfolios often feature a variety of assets, including both indices and forex, and it’s generally considered not a good idea to bet all of your capital on a single type of security. Both indices and forex, however, require traders to use a trading platform such as MetaTrader 4, often offered by brokers (find out more here). The platform can be used for both and more assets, and offers a friendly interface and plenty of analytical tools for adjusting your trading strategy.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
