Index trading has become popular among traders looking to escape individual company risk, or to hedge a portfolio of stocks against adverse market movements.
The other popular indices used by traders are the German Dax, FTSE 100, the Dow, the S&P 500 and of course the FTSE/JSE Top 40 Index. We have different names for these indices. It’s a way to avoid individual company risk. Because you are buying an index which is an average price made up of several underlying components, you get the benefit of diversification. If you were to buy the underlying stocks individually, it would be far too unwieldy for the average investor, and way too costly.
You have a variety of indices to choose from, and the costs are low compared with share trading. At IG Markets we do not charge commissions, so traders only pay the ‘spread’ costs. The spread is the difference in price paid by buyers and sellers of a financial instrument and is how brokers make money. The spread tends to be very small, but varies according to market liquidity. In other words, the more people trading the index, the lower the likely cost.
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