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How to use CFDs to trade stock market indexes

by , 04 September 2015

A CFD (or contract for difference) is a type of financial derivative, like a single stock future.

CFDs offer you a way to potentially profit from moves in the market whether it's higher or lower. And thanks to trading on margin, you can multiply these moves to multiply your profits.

But it's not just shares you can trade with CFDs. You can also trade indexes. Many traders find this an easier way to trade.

Read on to find out more…

The benefits of trading indexes with CFDs

If you opt to trade indexes with CFDs, you remove the need for individual company analysis. Instead you can look at what the overall market is doing or particular sectors.

Trading indexes with CFDs also reduces your risk as you’re not dependent on one company behaving the way you want it to. You can trade with the overall market trend.

How to trade indexes with CFDs

To trade indexes with CFDs, you trade exchange traded funds (ETFs). ETFs are passively managed funds which track an underlying index.

For example, there are ETFs that track the performance of the JSE’s Top 40 index, property index or resources index.

So instead of trading a specific share using CFDs, you trade an ETF. A trade works in exactly the same way, except the underlying is different.

You can trade international markets using CFDs

There are also South African ETFs which track international markets, such as Europe, the US and Japan. This gives you a way to trade these markets without taking your money offshore.

Trading ETFs which track international markets also hedges you against rand volatility.

As with trading CFDs on shares, you can also short many ETFs too. This means you can potentially profit from an index that’s falling in value.

So there you have it. How to use CFDs to trade stock market indexes.

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How to use CFDs to trade stock market indexes
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