Trading on derivative instruments through spread betting or contracts for difference (CFDs) gives you the opportunity to speculate on underlying global stock indices, such as the UK’s FTSE 100, the German DAX 40, the US Dow Jones Industrial Average, or Japanese Nikkei 225. 

Indices trading gives traders and investors the chance to gain exposure to an entire index, or investment theme, such as the tech-focused US NASDAQ 100. According to data from investment bank Goldman Sachs, the average 10-year stock market return is 9.2%, while the S&P 500 is one index that has outperformed the average, with annual returns of 13.6%. 

So, what are the advantages and disadvantages of trading on global indices? Read below to find out more. 

Benefits of trading on indices

Benefits of trading on indices

  • Indices offer traders the ability to diversify their portfolio, by offering access to a wide range of stocks or other assets with just a single transaction 
  • Traders are able to spread risk through trading on a large number of stocks, and often across a large variety of industries, as opposed to trading on just a single stock and industry
  • Indices offer appeal for traders taking both a short- and longer-term view on the markets. For shorter-term traders, major global indices and their constituent stocks are frequently featured in the media, and this in turn means regular price movements through the trading day, which can lead to potential trading opportunities. For longer-term trades, access to a wide range of stocks allows them to take a broader view on the general economic outlook, as well as minimise risk through diversification
  • Spread betting and trading CFDs enables traders to take a long or short position. Traders with an optimistic view on an index can aim to profit from a ‘bull’ market – when an index’s price is on the rise –  without having to buy, trade or research individual stocks, by opening a long (‘buy’) position. Similarly, when an index falls 20% or more, it’s said to be in a bear market,​ and traders can attempt to profit by going short (placing a ‘sell’ trade) in a down-trending market. 
  • Indices trading offers greater flexibility and opportunity, because some markets, including the UK 100 and US 30, can be traded out of hours, 24/5, so you can trade even though the underlying market is closed 
  • Indices can have relatively large daily price moves, as multiple stocks are affected by a variety of macroeconomic factors, which then impacts the overall value of the index
  • Trading on indices can be a relatively low-cost way to trade on a collection of stocks 

Disadvantages of trading on indices

Disadvantages of trading on indices

  • As it’s only feasible to achieve market returns, you can’t “beat the market” by trading on indices 
  • You have no sway over the composition of an index’s stocks, because you can’t add or remove any of its constituent holdings
  • There’s a relative lack of overall choice of index instruments to trade, when compared with some other asset classes, such as forex, or shares 
  • A market-capitalisation-weighted index, such as the FTSE 100 and S&P 500, is weighted in favour of companies with the biggest marker caps. This means that the movement of these stocks – AstraZeneca, Shell, HSBC, Unilever, and BP make up the FTSE 100’s top five by market cap as at 16 January 2023 – have a greater influence on the index’s price movement, than those stocks weighted towards the lower end
  • Similarly, a price-weighted index, like the Dow Jones 30, gives a greater weighting to stocks with the highest price per share, irrespective of market cap, or industry sector

As you can see, there are many potential pros, as well as cons, when it comes to trading global indices via spread betting, or CFD trading. Find out how you can get involved through derivative trading provider CMC Markets.