What an index is
A stock index is a number that summarises the prices of a basket of shares: the S&P 500 tracks 500 large American companies, the FTSE 100 the hundred largest on the London exchange, the DAX 40 large German companies, and so on. The index itself cannot be bought. What trades are futures on it, exchange-traded funds that hold the shares, and, at retail brokers, CFDs priced from the futures or from a cash price the broker derives.
How an index CFD is priced and sized
Brokers quote an index CFD in the currency of its market, so the S&P 500 in dollars, the DAX in euros and the Nikkei in yen, and a contract is usually one unit of the index per point, or a multiple. One contract of an index at 5,000 with a value of one dollar a point is a 5,000 dollar position, and a move of 50 points is 50 dollars. Many brokers offer fractional contracts. The retail leverage cap in Europe and Australia is 1:20 on major indices and 1:10 on minor ones.
The spread on a major index is a fraction of a point during its home market's hours and widens outside them. Most brokers also quote the major indices almost around the clock, pricing them from futures when the cash market is closed, which makes them tradeable in Asian hours but with wider spreads and thinner liquidity.
What moves an index
The economy, interest rates and company earnings drive the level over months. Day to day, index CFDs move on the same data releases that move currencies, on central bank decisions, on the results of the largest companies in the basket and on the mood of the market, and they tend to fall faster than they rise. They are also correlated with each other and with some currencies: a fall in American shares usually lifts the yen and the Swiss franc and weakens the Australian dollar, which matters for a trader holding positions in both.
What it costs to hold one
Index CFDs carry an overnight financing charge based on the index value and an interest rate plus the broker's markup, charged for long positions and, when rates are low, sometimes credited for shorts. Brokers also adjust CFD positions for dividends paid by the companies in the index: a long position is credited and a short position is debited on the day the shares go ex-dividend, so that the CFD holder is treated as if they held the shares. On an index with many constituents these adjustments arrive frequently and the swap calculator does not model them; the broker's specification does.
Educational content is general information and does not consider your objectives, financial situation or needs. Forex and CFD trading involves significant risk.