Index cfd
Family I · Instruments
Not to be confused with cfd, stock index, cfd trading.
Index CFD is a derivative contract between a buyer and a seller that tracks the price of a stock index. The position is opened at one price and closed at another; the resulting difference is credited or debited in cash. The index itself is not owned, and no physical delivery of constituent shares occurs.[1]
How an index CFD works
An index CFD is quoted as a price level that mirrors the underlying index. A trader who expects the index to rise buys (goes long); one who expects it to fall sells (goes short). Profit or loss is calculated as the point movement multiplied by the contract's value per point, which varies by provider and by index.
Because the position is leveraged, only a fraction of the notional value is required as margin. Financing charges are typically applied to the notional value of the open position, and the exact rate and calculation method vary by broker and by jurisdiction.
Worked example
A trader buys one index CFD on a stock index at 4,500 points, with a contract value of £10 per point. The index rises to 4,550 points and the position is closed.
Financing and commission, where charged, would reduce this figure. The same movement against a short position would produce a £500 loss before costs.
Key features and variations
- Underlying: a published stock index, not a single share or commodity.
- Settlement: cash only; no delivery of the constituent stocks.
- Leverage: margin requirements are set by the provider and are subject to local regulation, so they differ across brokers and countries.
- Costs: spreads, commissions and overnight financing are not standardised and must be checked with the individual provider.
- Trading hours: often extend beyond the cash index session, depending on the provider and the index.
Often confused with
- cfd
- A CFD is the broad category of contract for difference on any underlying, whereas an index CFD is specifically referenced to a stock index; the visible sign is the underlying asset named in the contract.
- stock index
- A stock index is the underlying market measure itself, such as the S&P 500, while an index CFD is a derivative contract that tracks its price; the visible sign is whether the item is a published index level or a tradable contract.
- cfd trading
- CFD trading is the activity of buying and selling CFDs in general, whereas an index CFD is a particular instrument within that activity; the visible sign is whether the term describes a product or the act of trading it.
See also
References
- ↑ Methodology documents of the index providers. An index CFD tracks a provider's index; constituents and weighting follow that provider's published methodology, not the broker.