Financial indices are regarded as lower-risk investments than single stocks. That's not always the case. However, if you look at the average returns of a major index such as the S&P 500, there's less variance than many of the most popular stocks. Again, we'll add the caveat that nothing is guaranteed in financial markets. Indices are just as prone to variance, both positive and negative, as individual stocks.
The point we're making here is that, in broad terms, indices are often better for people who are new to the financial markets or prefer using a low-risk strategy. You can't invest in an index directly, but you can own shares in something linked. Specifically, you can invest in Exchange Traded Funds (ETFs) or index funds. These instruments track the performance of an index, such as the S&P 500. Because you have shares in the fund, you own a piece of it and profit when its value increases.
Online Trading Platforms Make CFDs Accessible
A less common way to speculate on indices is via contracts for difference (CFDs). Like ETFs and index funds, CFD indices track the performance of an index. However, unlike direct investments, you're trading on price movements of an index via CFDs. A CFD isn't linked directly to an asset. This makes it a flexible financial instrument that allows you to make long and short trades. A long trade is when you speculate on the value of an asset increasing. A short trade is when you speculate on the value of an asset decreasing.
This way of speculating on popular indices in the UK, Europe, North America, and Asia is becoming increasingly popular thanks, in part, to the internet. MetaTrader 4 and 5 are the go-to platforms for many traders, but many leading brokers have proprietary software. These platforms, such as ActivTrader, are available on desktop and mobile devices. They offer average execution speeds of 0.004 seconds, as well as secure cloud-based services that provide real-time data and access to 1,000s of financial instruments.
Leverage and Flexibility Are Right for Some
All of these qualities have made CFD indices a viable alternative to the more traditional direct investments. That doesn't mean CFDs are the right option for you. Investing via an ETF, such as Vanguard's S&P 500 ETF (VOO), gets you dividend payments. You don't earn dividends with CFD indices. However, as we've said, CFD indices allow you to take long and short positions, which is something you can't do with direct investments.
You can also use leverage to trade CFD indices. Using leverage comes with the risk of your losses being magnified, but it does allow you to take a large position with a small amount of capital. Leverage and the ability to take long or short positions might be right for you.
We can't tell you how to speculate on indices. We've simply opened your eyes to the possibilities. Investing in indices has been popular for a while now, but there is another way. That way is trading CFD indices. So, if you want to spread your interests across a basket of assets rather than single stocks, make sure to check out indices and the two ways to speculate on them.
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