Index CFDs or Contracts for Difference are one of the more exciting and innovative products on the market today. They offer CFD traders the greatest opportunity for leverage and potential profitability but also an increased potential for risk and reward so getting to know this product is vital before jumping in to trade.
What are Index CFDs?
Index CFDs are a highly leveraged CFD product that allows traders to trade the major indices around the world like the S&P 500, Dow Jones, Nasdaq, FTSE, SPI 200 in Australia plus many others. Normally the margin is a low 1% of the total position size which gives traders 100 times leverage. Many traders use index CFDs as an alternative to trading the proper futures market which has higher margins, higher brokerage and less room to move on position sizes.
Should I trade my CFD account at maximum leverage?
With only 1% required to fund a position it is easy to see how your leverage can get out of control when trading index Contracts for Difference. This means that a $100,000 position on the SPI 200 or Aussie 200 only requires $1,000 of your money to control that full position. The potential gains and losses can be very large relative to your account as each move of only 1% on the index means you win or lose $1,000. It is because of the high amount of leverage that traders get themselves into trouble so when starting out trading the indices it is vital you keep your leverage low.
Trading Index CFDs with a Market Maker or Direct Market Access
Generally speaking most Market Makers allow clients to trade indices and they are one of the greatest money spinners for CFD brokers. The reason being is that with only 1% margin required to hold a position, CFD traders normally take out larger than normal positions. Instead of trading a $5,000 position they might hold a $50,000 position and think nothing of it.
In addition to that CFD brokers normally charge a premium for holding the positions overnight and this figure can run as high as plus or minus 4% which can add up very quickly, especially on large position sizes. You can begin to see how CFD brokers make a lot of money from these products despite most of them being commission free. Always best to read the fine print from your relevant CFD broker and ask some questions on trading forums before jumping on board.