CFD Indices Trading

CFD indices trading allows investors to speculate on the overall direction of a stock index, such as the FTSE. In this guide, we explain how a CFD index trade works with a detailed example. We also look at strategy considerations, popular indices and the best trading brokers in 2025.

Contracts For Difference

CFD trading involves a buyer and seller agreeing to pay the difference between the price of an asset at the time of purchase and the value at the contract’s expiry, or when the holder decides to sell. CFDs essentially allow speculation on price movements without taking ownership of the underlying asset, for example, stocks on the FTSE 100.

There are two ways of making a profit with CFDs; going long or going short. If a trader anticipates a price increase, they should go long, and if they anticipate a price fall, they should go short.

Importantly, CFDs are usually traded with leverage. This means an investor can bolster their purchasing power by taking a loan from their online broker. Most FCA-regulated trading platforms offer leverage up to 1:30. So if a trader deposits £10, they can trade with £300. This will amplify the trader’s potential profits and potential losses.

How CFD Indices Trading Works

Indices measure the aggregate performance of a pool of underlying stocks, the value of which fluctuates depending on how the individual assets perform. As an alternative to spot trading, index CFDs allow investors to trade based on a broader picture of an economy or sector, such as energy, manufacturing, or financial services.

For example, if following a general election, a trader anticipates that the UK economy will see an uptick, they could capitalise on this prediction by going long with a CFD on the FTSE.

On the other hand, if a trader believes that the country is heading for recession following high inflation and a cost of living crisis, a trader could go short with a CFD on the FTSE.

Trade Example

To understand how trading CFD indices works, let’s look at an example…

The FTSE 100 is currently valued at 7,500. However, a trader expects an upcoming announcement from the Bank of England will signal a boost to the country’s economy, and as a result, they expect the FTSE to rise.

With this in mind, the investor buys 20 FTSE 100 contracts. Each contract is equal to £10 per point, meaning that for each upward point of movement, the trader will make £200 (20 contracts X £10). Equally, for every downward point of movement, the trader will lose £200.

Two days later, following the positive announcement from the Bank of England, the FTSE is trading at 7,550, a 5-point increase. The trader decides to close their position, taking £1000 in profit (5 X £200).

It’s worth pointing out that traders will also need to minus any overnight financing fees, plus commission charges from their overall profit figure.

Benefits Of Trading CFD Indices

• Leverage allows traders to boost potential profits
• Less risk of dramatic price fluctuations because overall price changes are influenced by a variety of assets
• Trading CFD indices can suit a hedging strategy where the investor is looking to offset an existing long position
• Enables portfolio diversification, providing access to multiple industries, from pharmaceuticals to real estate and technology

Drawbacks Of Trading CFD Indices

• Traders do not own underlying stocks when trading CFD indices, so investors won’t receive dividend payments or have voting rights
• Trading on margin can magnify losses. Fortunately, most FCA-regulated brokerages cap leverage to 1:30 and offer negative balance protection, meaning clients cannot lose more than their account balance

Popular Indices

Some of the most popular indices for trading CFDs include:

• FTSE 100: Share index of the 100 companies with the highest market capitalisation listed on the London Stock Exchange
• S&P 500: Stock market index of the 500 largest companies listed on exchanges in the United States
• DAX 40: Stock market index of the 40 companies with the highest market capitalisation and liquidity listed on the Frankfurt Stock Exchange
• Nasdaq 100: Index of 100 non-financial businesses with the highest market capitalisation listed on the Nasdaq Stock Exchange
• Nikkei 225: Price-weighted index of 225 blue-chip companies with the highest market capitalisation listed on the Tokyo Stock Exchange
• Euro Stoxx 50: Index composed of 50 stocks from 11 Eurozone countries

These stock indexes are available at many of the top brokers. Their popularity also means there is a wealth of market insights and data available online to support investment decisions.

How Prices Are Calculated

Market Capitalisation Method

Stocks in an index are weighted based on the company’s market capitalisation (share price X number of outstanding shares). This means the performance of larger companies has more impact on the overall index value. These companies typically play a larger role in the market in terms of profits and employment figures.

The S&P 500 is the most popular market cap-weighted index. It is considered a gauge for the overall financial health of the United States as well as the wider world.

Price Weighted Method

Each stock is weighted based on the share price of the companies listed. Companies with a higher share price hold more weight and have a greater overall impact on the index. In these types of indices, the value of the index is proportionate to the average stock price of listed companies.

The Nikkei 225 is a popular index that uses the price weighted method and is a good option for investors looking to track the average price performance of a particular sector.

Unweighted

Here, securities within an index have equal weight. These types of indices are less common, but one example is the S&P 500 Equal Weight Index (EWI), which is formed of the same companies listed on the S&P 500, but each one has an equal weight of 0.2%. This will suit traders looking for smaller companies with lower share prices and market caps but which will still have an equal impact on the value of an index.

Importantly, how prices are calculated can impact the overall value of an index. For example, the price of the S&P 500 EWI increased by almost 5.62% from June to July 2022, compared to a 5.93% rise in the weighted S&P 500 during the same period.

Getting Started Trading CFD Indices

• Open an account with a broker: Investors will need to sign up with a brokerage that offers CFD indices trading. Popular examples include City Index, VantageFX and FXCC. Look at commissions, overnight financing charges, plus deposit and withdrawal fees. Also look at the platform offered and any mobile apps. Do they provide access to the popular MetaTrader 4 terminal, for example?
• Select an index: Choose an index you have a good grasp of and insights into. British traders may want to speculate on the FTSE 100 or FTSE 250. Alternatively, investors may want to make predictions on major US indices, such as the Dow Jones 30 and S&P 500.
• Go long or short: Following technical and/or fundamental analysis, choose which direction you believe the price will go (increase or decrease). Depending on the anticipated price change, go long or go short.
• Select the number of units: How large a position do you want to take when CFD trading? Check how many GBP per point movement you will get from the broker. And remember, leverage can help boost your position size but losses can also quickly accumulate.
• Add risk management tools: Implementing a stop loss order means that if the price of the index falls to a predetermined level, the platform will automatically close out your position, limiting potential losses. Equally, a take-profit order will automatically close a position when you have locked in a certain level of profit.

Bottom Line On Trading CFD Indices

CFD indices trading can be an effective way to diversify investment portfolios. They allow traders to speculate on the performance of individual economies and industries. The leverage element of CFDs also means that beginner traders can make potentially large profits with limited capital outlay.

Choose from our list of recommended brands to get started trading CFD indices.

FAQs

When Is The Best Time To Trade CFD Indices?

Each index has its own trading hours. For example, the FTSE 100 opens at 08:00 am and closes at 04:30 pm GMT each day. There are also specific periods where indices see the most volume and volatility, typically between 01:30 pm and 02:30 pm GMT. This is when the UK market crosses over with other major trading jurisdictions.

Is Trading CFD Indices Risky?

Investing is inherently risky. Most investors lose money when trading retail CFDs in the UK. With that said, there are risk management strategies and precautions that traders can take, including using stop-loss orders and take-profit orders. Check which risk alerts and tools an online broker offers before opening an account.

Is CFD Indices Trading Legal In The UK?

Trading CFDs on indices is legal in the United Kingdom. The best brokers are regulated by the Financial Conduct Authority (FCA) and provide a secure investing environment. Avoid firms that aren’t regulated by the FCA.

What Are The Best Indices To Trade CFDs?

Each index has its own merits and drawbacks. With that said, popular indexes that offer decent price action and exposure to some of the world’s largest economies include the FTSE 100, S&P 500, DAX 40, Nasdaq 100, Nikkei 225, and Euro Stoxx 50.

How Can You Make Money From Going Short With CFDs On Indices?

Going short on a CFD index is where you anticipate a price drop. You essentially ‘borrow’ CFDs on the chosen index and sell at the current price. You then buy at the new, lower price (this is where the profit is made), before returning to the lender.