What are indices and how do you trade them in New Zealand?

Stock indices are among the most traded CFD markets, offering broad market exposure, high liquidity, and an efficient way of expressing a macro view in a single trade. Here’s everything you need to know, from what are indices and how index trading works (including weightings and calculations) to how to trade indices and the risks to factor in. 

Key takeaways 

• Indices track the value of a basket of shares and are used to benchmark markets and trade broad themes. 

• You don’t trade a stock index directly. Instead, you use derivatives like CFDs that mirror index movements. 

• Most indices are capitalisation-weighted (some are price-weighted), which impacts how constituents influence index moves. 

• Drivers include macro data, interest-rate expectations, earnings season, sector rotation, geopolitics and more. 

What are indices? 

An index measures the performance of a group of stocks. Examples include the 200 largest companies on the ASX by float-adjusted market capitalisation (ASX 200) or the 500 large-cap US companies in the S&P 500. 

Turning a variety of share prices into a single number is the way that indices help traders benchmark returns and trade broad trends. They can also be grouped by region (US, Europe, Asia), sector (technology, financials) or company size. 

How does index trading work in New Zealand? 

You can’t buy an index outright. Instead, traders use CFDs that track the underlying index level. With a CFD, you go long if you expect the index to rise or short if you think it will fall. Profit/loss reflects the move in the index-based instrument multiplied by your position size. 

With CMC Markets, you first select indices in the product library, choose your market, pull up a chart, apply indicators/drawing tools, and place an order with risk controls attached. 

How are indices calculated? 

Indices are calculated and weighted in different ways, and this is usually down to the managing company (such as index providers like S&P, FTSE and MSCI). Here are some common methods used: 

• Equal-weighted: constructed by putting the same amount of capital into each stock, so they have equal weight within the portfolio. 

• Market capitalisation-weighted: made up of a set number of companies that have the highest market value. These tend to have a higher impact on the overall value of the index. 

• Price-weighted: give the most weight to stocks that are priced the highest. Stocks priced the lowest will have the smallest effect on the index. 

They can be rebalanced periodically, such as daily, weekly, monthly, or quarterly, to ensure that the weighting of each stock is in line with its formula and objective. 

The value of an index depends upon many factors, such as company productivity, prices, and employment. In order for a company to be added, it could be selected by a committee, as is the case with the S&P 500. The committee will consider the eligibility of each new addition based on strict criteria, such as market capitalisation, financial viability and the length of time it has been publicly traded on the stock exchange. 

What are the most popular global indices? 

Here’s a list of the most traded global indices and their main constituents: 

• S&P 500 includes 500 of the largest US companies by market cap, including Apple, Microsoft, and Amazon. 

• Dow Jones Industrial Average (or Dow 30 or US 30) includes 30 blue-chip US companies, such as American Express, 3M, and Walmart. 

• NASDAQ 100 tracks 100 of the largest US technology stocks, with major holdings including Advanced Micro Devices, Adobe, and Alphabet. 

• FTSE 100 or UK 100 tracks 100 of the UK’s biggest companies, including AstraZeneca, Unilever, and Diageo. 

• Russell 2000 tracks 2,000 US small-cap companies, including Plug Power, Penn Gaming, and GameStop. 

• CAC 40 or France 40 tracks 40 of the largest companies in France, including L’Oreal, Total, and Sanofi. 

• Nikkei 225 tracks 225 of the largest companies in Japan, including Mitsubishi, Kobe Steel, and Nippon Yusen. 

• DAX 30 features 30 of the largest German companies, such as Linde, SAP, and Siemens. 

• Hang Seng or Hong Kong 50 is composed of the largest stocks in Hong Kong, including Industrial and Commercial Bank of China, Xiaomi Corporation, and CNOOC Limited. 

• EURO STOXX 50/600 or Euro 50 is composed of the largest companies in the Eurozone, including ASML, Linde, and Sanofi. 

• MSCI World holds stocks from multiple countries around the world, with its largest holdings tending to be US stocks. 

• The CBOE Volatility Index (or VIX) calculates the 30-day expected volatility in the US stock market. 

• NIFTY 50 represents the 50 largest stocks in India, including Reliance Industries, Tata Consultancy Services, and HDFC Bank. 

• S&P/TSX 60 is a benchmark for Canada, featuring 60 stocks such as Shopify, Royal Bank of Canada, and Toronto-Dominion Bank. 

• KOSPI tracks 900 Korean stocks such as Samsung Electronics, Naver, and Hyundai Motor Company. 

What are the factors affecting the prices of indices? 

Index levels respond to a mix of top-down and bottom-up forces: 

• Macroeconomics: Inflation, unemployment, GDP and more can steer interest-rate expectations and risk appetite. 

• Central-bank policy: Rate decisions and guidance (hawkish/dovish) can reprice equity risk premiums quickly. 

• Earnings season: Aggregate beats/misses and outlooks drive sector rotation and index trends. 

• Sector/commodity dynamics: Such as tech leadership in the US, or commodity swings influencing the ASX 200. 

• Geopolitics and news: Trade tensions, fiscal policy and election risks affecting sentiment and volatility. 

• Volatility gauges: Some traders monitor indices like the VIX to contextualise risk conditions. 

Why trade indices? 

Indices can suit traders seeking broad exposure, tactical two-way opportunities, and diversification. For example, one position can capture market-wide themes (growth, policy pivots) without single-stock event risk. 

Major benchmarks also usually feature deep liquidity and tight spreads. And best of all, they can complement a portfolio of single stocks and other asset classes, increasing diversification. 

How to trade indices with CMC Markets 

With CMC Markets, you don’t trade on or invest directly in the global index. Through CFDs, you can trade on derivative instruments that are based on the FTSE 100 and more. Traders can take a position based on whether they think the value of an instrument will rise or fall, and subsequently make a profit or loss depending on which way the markets move.  

Step-by-step guide: 

1. Fund your trading account or practise with virtual funds on a demo account first: Within the product library on the platform, select ‘Indices’. 

2. Choose an index to trade: We offer 80 indices that are based on indices like the FTSE 100 and more. 

3. Click on the index name to bring up a chart: Here, you can customise by chart type and timeframe​, and add technical indicators and draw tools for technical analysis. 

4. Pick a strategy: Decide whether you want to go long (buy button) if you think the index will rise in price or go short (sell button) if you think it will fall. 

5. Input the relevant fields: This includes order type, entry price, and how much you are willing to risk per point of movement (spread betting account) or position size (CFD account). 

6. Control risk on your trade: Many traders opt to use stop-loss orders to help control losses. 

7. Place the order and monitor: You may decide to hold your position if you are making a profit, or adjust or close your trade if you are experiencing a loss in order to protect your capital. Remember that you can lose more than your deposit, so you should ensure you are comfortable with the risk management tools available on the platform. 

Risks and considerations of trading indices 

• Indices trading is considered by many to be a lower-risk strategy, as you are spreading your risk across an entire segment or sector, as opposed to a single stock. However, there are still some risks involved, such as the use of leverage, which can amplify losses and cause traders to lose more than their entire deposit if a trade is unsuccessful.

• You are trading a derivative instead of a physical asset. Here, a derivative is an instrument that obtains its value from the price of an underlying asset, such as an individual stock or stock index. The risk is that the movement of just one stock or security could have a major impact on the overall value. 

• It’s important to do some research prior to trading indices. It’s a good idea to make use of risk-management tools​ to protect your positions against sudden market moves. These include stop-loss orders such as guaranteed stop-losses. A stop-loss order will close a losing trade once the price passes a trigger value pre-decided by the investor. These are very effective in the event of sharp price action. 

Start trading indices with CMC Markets New Zealand 

Now that you know what are indices and how to trade indices, you can turn a macro view into a structured trading plan, choosing a benchmark, analysing drivers, sizing appropriately and managing risk with careful discipline. Now it’s time to get started by opening a demo account.