Index Trading and Commodity CFDs


Q.: Can I actually trade an index using CFD's?

A: Yes, can actually trade the indices using index CFDs which allow you to track the futures prices of the market you are looking to trade. Amongst the most common Index CFDs there are the S&P 500, Dow Jones, NASDAQ in the USA, the DAX, CAC and MIB in Europe and FTSE 100 in the UK as well as important Asian measures such as the Nikkei 225 and the Hang Seng. Of course there are many other tradable index CFDs although the liquidity may not be as high. The value per index point of one CFD is defined as one unit of the base currency, namely a pound, dollar or euro...etc

An advantage that index CFDs have over equity CFD trades is that unlike a share an index CFD cannot go to zero as an index is simply a benchmark of the largest stocks on that particular exchange. Margin requirements are usually small, however if starting out it is a good idea to trade at the minimum amount per point. Another point to note is that Index CFDs are generally commission-free with the providers adding a little on to the bid-offer spread. Some providers even continue quoting index CFDs even when their benchmark underlyings are closed which enables investors to take a view on what they think will happen the next morning.

 

You can also use an index CFD to hedge a long-only portfolio. For instance if you have a portfolio of shares which are highly correlated to an index say the FTSE 100, then every day the value of the portfolio will go up or down but over time it would cost you quite a bit in trading charges and stamp duty (stamp duty is a 0.5% tax levied on share purchases in the UK), to try to trade in and out. You can use an index CFD to short the index when you perceive the index to be high using whatever method you prefer (say, technical analysis). Without the index hedge the share portfolio will have made you a profit which if the market falls will be wiped out again. The index CFD will ensure that you make a profit as the market falls which can be taken once you believe the market to be relatively low. You can also set a stop loss a small distance above the opening price, so if the market continues to go up (i.e. breaks through the resistance level in the case of a range-trading market) you will still gain from your existing portfolio. This is a simple effective risk reduction method.

Q.: What about Commodity CFDs!?

A: Some CFD providers even give you access to the commodity markets although coverage of these markets varies substantially from provider to provider. Most will include all main precious metals, energies, grains and softs with the most common being gold and crude oil. Prices are usually derived from the associated future exchanges and will thereby automatically close on the relevant settlement date. Usually with Commodity CFDs the broker will add a little to the bid-offer market spread as brokerage commission.


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