While stocks provide a sign of the financial climate for specific companies, the indices permit the traders to step back and see at the greater picture of what the situation on the financial markets actually is. Be that as it may, the nature of an index means that traders have to be take numerous stocks into consideration instead of a single company, meaning that there are likely to be a bigger number of viewpoints which are commendable of thought.
Speaking about trading, the indices function in a comparable way to numerous other Spread Bet and CFD items. Just like the specific stocks, which they are comprised of, the traders can take positions subordinate on whether they think that the value of the index will rise or fall. Once more, as with individual stocks the point is to either ‘sell’ at the bigger price than the one used for ‘purchase’ or then again ‘buy back’ at a lower price in case one initially ‘sold’. All the stocks recorded on the index will be included within the continuous calculations to decide the current level of the index, with the index rising or falling in value, depending on the current quality or shortcoming of its component stocks.
Because indices include lots of various stocks, the volatility of an index can be very high, because of the unstopping movement of the share prices. In any case, for the same reason it is uncommon for indices to move by more than several percentage points per day, since it’s abnormal that all stocks on an index would encounter sharp developments within the same course at the same time. There are events, however, when this does happen; such an example are the crashes of the stock market crashes within the 20th and 21st centuries.
The following situation, trader x chooses to take a position on the FTSE100. Suppose that the FTSE is currently trading at a level of 6949:6950, which means that the spread is one point at the moment. The trader chooses to ‘purchase’ £10 worth of the FTSE at the 6950 level. Since the ‘sell’ level is 6949, the trader starts off £10 down, since if the trader were to close this position quickly, that’s the loss they would experience.
Let’s suppose that the index along these lines raises to a level of 6955:6956. If the trader were to sell his £10 worth of FTSE at this moment, the profit on the trade would be £50; the first point of movement in the trader’s favour would turn their -£10 position into a £0 position (where they would be making neither a profit or a loss and would break even if they exited at this point), with the following five points of movement then being pure profit.
Still, let’s suppose that instead of the FTSE’s value going up, it goes down instead, to a level of 6945:6946. In this situation, the trader would lose £50 if they sold at that time, because the price at which that £10 worth of FTSE is being sold is five points lower than the price at which it was bought at.