The index based trading involving CFD or contract for difference in Forex Exchange Trading is based on speculation and the overall state of the stock market. However, it differs from share trading in a stock exchange. This is because in stock market transactions, we are more concerned with the value of a specific stock rather than the whole market. However, the index represents a sector comprising of similar companies, so to a great extent, a trader is concerned with the performance of the whole sector rather than just the individual company.
The most popular indices for CFD trading online are S&P 500, Dow Jones and FTSE 100. So a trader dealing in index market makes a contract to exchange the difference of the price for certain index over two points of time. We know that there are two parties involved in similar types of contracts and these are called as buyers and sellers. According to the contract, the seller needs to pay the buyer for the difference. This difference is defined as the difference between the current prices of an asset and the contract price. If this price is negative, it means the buyer has to compensate the seller for the difference.
In the indices market, a similar contract between a seller and the buyer happens through Online Forex Trading Broker. Let’s assume that we are trading in FTSE 100. So if a trader perceives that the said index is going to decline in the forthcoming days, the ideal position, he should make would be a short position. That means that trader should sell in order to buy it in future. This simply means that the trader wants to capitalize from the knowledge that the index is going to decline in future and it is the best decision to sell it now in order to gain in future. However, there might be people who would speculate on the contrary. They would speculate that the index is going to appreciate in value and form the contract on that basis. So they would buy the index instead.
In case, the value of the index declines the traders would buy the index at the reduced rate. So, this person who has sold it at a higher price would buy it at a lower price to close the transaction. And that is how he would book the profits. Whereas the person who has bought it at a higher price we have to sell it at a lower price and that is how he would suffer losses on the index. And that is how the market creates opportunities through Forex Currency Trading Broker for the smart traders to make money.