Indices CFD trading 101
Learning objectives
Calculate what an index point is worth at a given position size
Size an index position from your risk percentage and stop distance
Account for financing and dividend adjustments on an index CFD position
What you're actually trading
What is an index: S&P 500, FTSE 100, Nasdaq covered what you're taking a position on. This lesson covers what happens in your account when you do.
An index isn't something you can own. There's no certificate, no shares to hold, nothing to deliver. It's a calculated number.
So every retail index instrument is a derivative of some kind, and on your platform it's a CFD, which as What is a CFD (and what you're actually trading) explained is a contract with your broker to exchange the difference in that number between opening and closing.
That makes indices the purest example of the CFD concept. With gold you could at least imagine the metal. With an index there is no underlying object at all.
Points, not pips
Index movement is measured in points, which are simply units of the index value. An index moving from 5,480 to 5,495 has moved 15 points.
Point value depends on contract size, and contract sizes vary considerably between indices and between brokers. A common structure is one contract per point per lot, so:
Position size
Value per point
1.00 lot
$1 per point (or £1, €1, by index)
0.10 lot
$0.10 per point
0.01 lot
$0.01 per point
But this is genuinely broker-specific in a way that forex lot sizes are not. Some brokers quote index contracts at $10 or more per point per lot. Check your platform's contract specification before your first trade, because being wrong by a factor of ten is entirely possible here in a way it isn't on EUR/USD.
The currency also varies. A US index is priced in dollars, the FTSE in pounds, European indices in euros. If your account is in a different currency, a conversion is happening.
Sizing an index trade
Anna has $5,000 and risks 1%, so $50.
She's trading an index at $1 per point per lot. Her invalidation sits 40 points below entry.
Risk per lot = 40 points × $1 = $40
$50 ÷ $40 = 1.25 lots
So 1.25 lots, or 1.2 if her platform steps in tenths, which risks $48.
Now the same account on an index quoted at $10 per point:
$50 ÷ (40 × $10) = 0.125 lots
Same trade, same risk, one tenth the position size. The only thing that changed was the contract specification, which is exactly why checking it first matters.
Compare that with the forex arithmetic in Risk per trade: the 1% rule and position sizing. The method is identical. The inputs are not.
Financing
An index CFD held overnight carries financing, as any leveraged position does.
One thing worth understanding about the direction. Index financing typically reflects a benchmark interest rate applied to the full position value. That generally means long positions are charged and short positions may be credited or charged less, depending on prevailing rates and the broker's markup.
Over a day this is small. Over weeks on a large position it becomes a real number, which is the structural point CFD vs spot trading: what's the difference? made about CFDs being priced for trading rather than holding.
Dividend adjustments
This one surprises people and it's specific to equity-based instruments.
When a company in an index goes ex-dividend, its share price drops by roughly the dividend amount. Since the index is calculated from constituent prices, the index itself falls by a corresponding amount even though nothing has actually deteriorated.
Your broker compensates for this so you aren't arbitrarily advantaged or disadvantaged by an event that isn't a market move:
- Long positions are credited an amount reflecting the dividend
- Short positions are debited
This matters most around the periods when many constituents go ex-dividend together, which cluster at particular times of year depending on the index. A short position held across a heavy dividend period pays out more than the trader expected, and the chart shows a drop that wasn't a fall in value.
Note this applies to cash index instruments. Futures-based index instruments have expected dividends already priced into the contract, which is one of several differences Index trading hours: cash vs futures pricing covers.
Spreads and conditions
Spreads are tightest during the underlying exchange's hours and widen substantially outside them, for the liquidity reasons Forex sessions and liquidity set out. A US index quoted overnight is being priced with far fewer participants.
Volatility sits between forex and single shares. A major index typically covers something like three quarters of a percent to well over one percent in a day, which is roughly double a currency major and considerably less than an individual stock.
Movement concentrates around the cash open. The first hour after the underlying exchange opens is usually the most active of the session, as overnight news gets priced by the full market rather than by the thinner futures crowd.
Key takeaways
An index cannot be owned, so every retail index instrument is a derivative. On your platform it's a CFD on a calculated number
Movement is measured in points, and point value per lot varies significantly between brokers and indices. Check the contract specification before your first trade
Financing applies overnight, typically charging longs and treating shorts more favourably, which makes index CFDs better suited to shorter holds
Dividend adjustments credit longs and debit shorts when constituents go ex-dividend, offsetting an index drop that isn't a fall in value