What are indices and how do you trade them?

What is an index?

A stock market index is a numerical measure of the value of a group of stocks. It is calculated by aggregating the prices or market capitalisations of its constituent companies into a single figure, which rises and falls as those underlying share prices move. Indices are used as benchmarks for market performance, as reference points for investment funds, and as the basis for financial derivatives including spread bets and CFDs.

The most widely followed indices are the FTSE 100 in the UK, the S&P 500 in the US, the Nasdaq 100 (technology-heavy US index), the Dow Jones Industrial Average (30 major US companies) and the DAX (Germany's 40 largest listed companies). Each has a different composition, weighting methodology and character. You cannot buy an index directly: access comes through index funds and ETFs, spread bets, CFDs or the constituent shares.

How are indices calculated?

The two most common index calculation methods are price-weighted and market capitalisation-weighted.

Price-weighted indices give greater influence to companies with higher share prices, regardless of their total market value. The Dow Jones Industrial Average is the best-known price-weighted index. A company with a share price of £100 carries twice the weight of one with a £50 price, even if the latter is a much larger company by total value.

Market capitalisation-weighted indices, which are far more common, give greater influence to larger companies by total market value. The FTSE 100 and S&P 500 are both market-cap weighted: the largest companies, such as Apple in the S&P 500 and HSBC in the FTSE 100, have the greatest impact on index movements. Free-float weighting refines this further, only counting shares available for public trading rather than total shares outstanding.

Major global indices

Ways to get exposure to indices

1. ETFs and index funds

The most common route for long-term investors. UK ETFs tracking the FTSE 100, S&P 500 and global indices are available on the London Stock Exchange, ISA-eligible, and carry OCFs as low as 0.03%. Global ETFs provide diversified exposure across multiple indices or regions in a single fund. Exchange-traded products more broadly include ETCs and ETNs alongside ETFs, each with different structural characteristics.

2. Spread bets and CFDs on cash indices

The most popular way to trade indices short-term. A cash index spread bet or CFD gives exposure to the current level of the index. There is no fixed expiry: positions can be held for as long as desired, subject to overnight funding charges. Cash index markets typically have the tightest spreads and are suited to day traders and swing traders. Our FTSE 100, US 500 and other major index markets are available nearly 24 hours a day.

3. Index futures spread bets and CFDs

Index futures spread bets and CFDs reference the price of the underlying futures contract rather than the spot index level. The spread is slightly wider than cash indices, but there are no overnight funding charges, making them more cost-effective for positions held over several days or weeks. Futures prices reflect expected dividends and interest rates over the contract period, which is why they may differ from the spot index level.

4. Individual shares in the index

Buying shares in individual companies within an index provides targeted exposure to the companies you believe will outperform. This requires individual company research and results in more concentrated risk than a tracker, but also the potential for higher returns if individual selections outperform the index. Individual FTSE 100 shares can be held in a stocks and shares ISA or share dealing account.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with us. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Always use robust risk management strategies including stop loss orders.

What moves indices?

Index prices are driven by the aggregate movements of their constituent shares. The most significant factors are:

• Company earnings: quarterly results from major constituents are the single most frequent driver of index movements. When large-cap earnings beat expectations, indices rise; when they disappoint, indices fall.
• Interest rate decisions: central bank decisions affect the discount rate applied to future earnings across all stocks. Rate hikes typically weigh on growth-heavy indices like the Nasdaq 100 more than income-heavy indices like the FTSE 100.
• Macroeconomic data: GDP growth, employment figures, inflation data and manufacturing surveys all affect index sentiment, particularly when they signal a change in the rate outlook.
• Currency movements: for the FTSE 100, a weaker pound typically supports the index because most constituents earn revenue in foreign currencies. For internationally exposed companies, exchange rate movements affect reported earnings.
• Geopolitical events: wars, trade disputes, elections and unexpected political events can cause sharp index moves, particularly in markets with significant energy or commodity sector exposure.

Indices FAQs