Trading indices vs forex: what are the main differences and what can you trade?
The index and forex markets are both very liquid, made popular by the variety of methods traders can use to get exposure. Learn about the differences between trading indices vs trading forex.
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Trading indices vs trading forex
Trading indices and forex are two of the most popular ways that you can get exposure to the financial markets. Indices trading focuses on tracking the performance of a group of stocks while forex trading looks at the exchange value of buying one currency and selling another.
When trading indices, you’d take a position on an group of stocks or sector’s price level rising or falling without taking ownership of the asset. The most popular indices comprise of some of the world’s largest companies and are weighted differently depending on the market cap of its constituents.
With forex trading, you buy and sell a currency on the foreign exchange market with hopes that it’ll appreciate, or depreciate. The more times a currency is traded every day, the more volatile the price of other currencies become.
For example, you could trade any combination of two currency pairs like the British pound against the US dollar (GBP/USD), the euro against the US dollar (EUR/USD), and the US dollar against the Japanese yen (USD/JPY).
These are very liquid markets, providing traders with the opportunity to get exposure and make profit. In the same breath, there’s risk of possible loss if the market moves against them.
With us, you’ll take a position on both markets using CFDs.
Trading indices vs forex: which market is better for beginners?
It depends on several factors, but most beginners tend to get exposure to indices at the start of their journey as forex is more suited for experienced traders. This is because the indices market follows the direction of stocks closely, making it slightly pronounced as to how the index will move in the future.
For example, during Covid-19, lots of tech stocks were resilient while most sectors crumbled as a result of the lockdown. If you took a long position on the NASDAQ 100 Tech Index (US Tech 100), which contains the 100 largest US tech stocks, you probably would’ve made a profit during that period.
Generally, people follow certain brands that they love, and have some experience of how its performance or release of a new product may affect its share price. Therefore, when someone starts trading, indices are a natural next step.
Since trading indices means taking a position on several stocks in one position, the composition of the index may include the brand that you love and other assets that can mitigate the risk compared to just trading a single stock.
Some of the factors that affect an index’s price include big events like interest rate decisions, a country’s economic performance and many others. This is why it’s prudent to use fundamental analysis to support your decision to take a particular position.
Forex trading tends to be the preferred market by professional traders, as it is more complex in comparison to indices trading. You must ensure that you know how to trade forex, have a good grasp of the method you’re going to use and have a solid trading strategy before you get exposure.
As a beginner, it's important to supplement your knowledge before you start trading with real money. You can use IG Academy – a self-learning hub, complete with comprehensive trading resources – to help you learn at your own pace.
Beginners are encouraged to open a demo account thereafter. This is a simulated market environment that aims to recreate the experience of ‘real’ trading as closely as possible.
You’ll get a feel for how different products and financial markets work without the risk of losing any real money, so that you can explore and experiment using different trading strategies with confidence.
When you open a demo account with us, you’ll be given immediate access to a version of our online platform, along with a pre-set balance of $20,000 in virtual funds to practise with. Once you’ve gained enough confidence and you’re familiar with trading on the platform, you can decide to upgrade to a live account.
What are the ways to trade indices and forex?
With us, you’ll trade indices and forex pairs using our derivative products:
Trade more than 80 indices with us via CFDs:
- You can get exposure using CFDs and trade on the spot (cash) price if you have a short-term outlook or use futures and options markets to take a long-term position.
- CFD trading on forex involves buying and selling contracts to exchange the difference on price from the point at which the contract is opened, to when it’s closed. Additionally, CFDs are popular because they’re also leveraged, and in some territories you can offset any losses against profits for capital gains tax (CGT) purposes1
Forex trading vs indices trading: key similarities and differences
Explore the benefits and risks of trading forex and indices while looking at why you’d choose one over another:
Forex trading vs indices trading: key similarities
- Liquidity – these are two of the most liquid asset classes available in the market, with forex experiencing trillions of dollars’ worth of transactions every day and indices also exhibiting a staggering figure
- Spreads – index and forex prices tend to have tight spreads, which makes it ideal for day traders that want to get exposure in the short term
- Economic news and events – index and forex fluctuations tend to be a reflection of the reported economic health of a region they represent
- Leveraged products – both markets can be traded on leverage, enabling you to open a position by paying just a small fraction of the full value of the position upfront. Note that your profit or loss will be calculated based on the full position size, not your deposit amount. This means that you should take steps to manage your risk effectively
Forex trading vs indices trading: main differences
- Range of markets available – forex trading involves buying and selling currency pairs in three categories (major, minor and exotic). With indices, there are far more index funds that you can get exposure to
- Type of asset class – indices trading involves speculating on the performance of a group of stocks rising or falling while forex focuses on currency conversions
- Volatility – indices tend to experience much more volatility than trading forex, often moving more points per day than currencies. These sharp, unpredictable movements can be triggered by world events or factors unique to one sector. With us, you can minimise your risk, even in volatile market conditions, by using our range of risk management tools.2
Trading indices vs forex summed up
- Indices trading involves taking a position on the performance of a sector or economy while forex trading focuses on buying and selling currencies
- Beginners typically trade indices at the start of their trading journey instead of forex because they tend to be more predictable based on how stocks and the economic health of a country is
- With us, you’ll trade indices and forex pairs using CFDs
- You can trade indices and forex on the spot market price if you have a short-term outlook, or choose futures or options if you have a long-term outlook
- Some of the similarities between trading indices and forex include high liquidity, tight spreads and influence from macroeconomics
- The differences between forex and index trading include volatility, range of markets available and the type of asset class
1 Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
2 Note that despite only paying a small percentage of the full trade’s value upfront, your total profit or loss will be calculated based on the full position size, not your deposit amount. This means that you should take necessary steps to manage your risk effectively.
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