Index Trading Made Easy with ZuluTrade

Index trading is defined as the buying and selling of a specific stock market index. Investors will speculate on the price of an index rising or falling which then determines whether they will be buying or selling.

Since an index represents the performance of a group of stocks, you will not be buying any actual underlying stock, but the weighted average performance of these stocks, not every stock has the same per cent impact to an index. Big market cap stocks heavily affect the direction of an index. When the price of shares for the companies within an index goes up, the value of the index increases. If the price instead falls, the value of the index will drop.

The ability to go "long" or "short" means that you can take advantage of stock indices prices falling or rising with the help of CFDs or options derivatives.

Diversifying your portfolio among so many companies, by investing money into just one index fund, ensures that the value of your portfolio is not overly correlated with the fortunes of any one company listed in the index.

The turnover ratio measures the percentage of a fund's holdings replaced in a single year. Index funds have a lower turnover ratio than actively managed funds. Index fund turnover ratios are usually about 1% to 2% per year, compared to 20% or higher for some actively managed mutual funds.

If a fund sells a stock for profit, then the difference between the initial purchase price and the final sale price is considered a capital gain. Funds with higher turnover ratios accrue capital gains more frequently, which results in more taxes owed by the fund's investors.

A major benefit of investing in index funds is that the costs, including taxes and management fees, may be lower than those associated with other types of investment funds.

Individual companies both outperform and underperform the market, but, in general, the overall stock market increases in value over time. As a result, the index can help you identify the trend direction and filter individual investing actions, which makes them an excellent value for any investor.