What is a stock index?
A stock index is a basket of shares that shows the performance of part of the market in one number. When news says "Wall Street was up today", it usually refers to an index. Trading an index CFD means you speculate on that number rising or falling, as you would with a currency pair. You do not buy the 30 or 100 shares. You hold a contract with the broker that follows the index level.
US30 (Dow Jones Industrial Average)
US30 follows the Dow Jones Industrial Average, which consists of 30 large US companies from different industries. It is price-weighted, which means shares with a higher price have more influence on the level, regardless of company size. Brokers name it differently: US30, DJ30, Wall Street 30 or similar. Check the name in your own platform.
NAS100 (Nasdaq 100)
NAS100 follows 100 of the largest non-financial companies listed on the Nasdaq exchange, with a strong weight in technology. It is often more volatile than US30 because of this concentration. Names also vary: NAS100, USTEC, US100 and so on. Other popular indexes at CFD brokers include the S&P 500 (US500), the German DAX (GER40) and the UK FTSE 100 (UK100).
Contract size, points and tick value
Index CFDs are priced in points. The value of one point depends on the contract size set by the broker, so verify it in the instrument specification. A common set-up is that 1.00 lot gives 1 USD per point (some brokers use 10 or 0.1). Using this assumption:
| Lot size | Value per 1 point (assumed) | Move of 100 points |
|---|---|---|
| 1.00 | 1 USD | 100 USD |
| 0.10 | 0.10 USD | 10 USD |
| 10.00 | 10 USD | 1,000 USD |
Daily ranges of these indexes can be hundreds of points, so even small lot sizes can produce large changes. Never copy a lot size from forex without calculation. The pip-and-lot logic is in lots, pips and leverage.
What moves indexes
- Company earnings: reports from the biggest members, especially large technology firms for NAS100.
- Interest rates and central bank talk: higher rates can pressure share valuations, and cuts can support them, although not always.
- Economic data: employment, inflation, growth and consumer spending.
- Risk mood: in fear markets indexes may fall sharply together.
- Politics and world events.
Indexes and the US dollar often react to the same US news, so a trade in an index and one in a dollar pair such as EUR/USD can be exposed to the same event.
Trading hours
US index CFDs are usually available nearly 24 hours on weekdays, but the main cash session of the US stock market is only a part of that, and it is when volume and volatility are highest. The opening and closing of the cash session are fast periods with spreads that widen. Outside these hours liquidity can be thinner. Broker times are often shown in a server time zone, so convert them to your local time. Platforms can also pause trading for short breaks each day.
Margin and leverage on indexes
Margin is the position value divided by leverage. Example (invented level): NAS100 at 18,000, 1.00 lot at 1 USD per point has a notional value of 18,000 USD. With 1:20 leverage the margin is 900 USD; with 1:100 it is 180 USD. A daily move of 2% is 360 points, which is 360 USD per 1.00 lot. On a small account the size must therefore be tiny. Leverage for indexes is typically lower than for forex, but still high enough to cause large losses.
Worked example: risk-based size
Invented numbers. Account 2,000 USD. Risk 1% = 20 USD. You buy US30 with a stop-loss 100 points below. At 1 USD per point per lot:
lot size = 20 / (100 x 1) = 0.20 lot
If your stop were 200 points away, the size would be 0.10 lot. Remember that gaps (for example at the open, or after news) can take the price through your stop. Sizing and stops are explained in risk management.
Costs and dividends
You pay the spread, sometimes a commission and an overnight financing charge. Index CFDs also reflect dividends: when shares in the basket pay a dividend, a long CFD position may receive an adjustment and a short position may be charged. Details are in the specification, and spread, commission and swap explains how to add the costs up.
Choosing a broker for indexes
Look at which index CFDs are offered, the contract size, the spread at the time you trade, and the regulatory status. XM, for example, offers index CFDs among its instruments, but it carries regulator warnings in some countries, which we describe in the XM review. Compare with other brokers using how to choose a forex broker.
How to begin
- Open a demo account and find the index in the market watch. Read its specification.
- Watch the cash-session open for several days and see how the price and spread behave.
- Trade the smallest lot with a stop-loss and a size from the formula.
- Avoid holding positions over major earnings or data without a plan.
- Keep a journal.
Index CFDs versus index funds
People often confuse trading an index CFD with investing in an index fund. A fund buys the underlying shares, you hold units, and your plan is usually measured in years. A CFD is a short-term contract that includes leverage and financing costs, and is better suited to active traders who accept the risk. If your goal is long-term savings, a CFD is usually the wrong tool.
Gaps at the open
The US cash market opens at a fixed time, and the index CFD often moves quickly in the first minutes. If important news came out while the market was closed, the price can jump from the previous close. A stop-loss is then filled at the next available price, which might be far from the level you chose. Careful traders reduce size when they hold through a gap-prone period such as an earnings season, and they avoid entering in the very first seconds of the session.
Correlation between indexes
US30, NAS100 and US500 often move in the same direction because they share the same drivers. A long position in two of them is closer to one larger position than to two separate ideas. Add their risks together when you size the trade. The same warning appears in risk management.
Spread and slippage on indexes
Spreads on index CFDs are quoted in points and can be wide when the market is quiet or news is released. Slippage, where the executed price differs from the price you clicked, is also common at the open. Measure both on a demo account, at the hours you plan to trade, before you trust any strategy.
Practical checklist before the first index trade
- I know the contract size and the value of one point.
- I know the trading hours in my own time zone.
- My stop-loss is set and my size is based on it.
- I have checked the calendar for earnings and data during my trade.
- My total risk across all open trades is within my daily limit.
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Risk warning
Index CFDs are leveraged products and prices can move hundreds of points within hours, and gap past your stop-loss. Most retail traders lose money. Index levels and sizes in this article are invented examples, not quotes or forecasts. Trade only with funds you can afford to lose entirely, and only if you are 18 or older. This article is education, not personal investment advice.