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1. WHAT ARE THE INDICES?
Stock market indices appeared in the 20th century in order to analyze the performance of a market and to draw conclusions about the state of the economy.
A stock market index is made up of the best-performing stocks on a given stock exchange and is therefore essential in portfolio management. These indices are representative of a particular market or industry.
For example, the CAC 40 index reflects the trend of France's largest capitalizations. Other indices such as the CAC Health or CAC Technology indices represent specific business sectors.
Euronext has developed a wide range of indices that make it possible to track market trends by refining the offering and thus making indices more specific to investors' needs.
CHART BY SECTOR OF THE CAC40
2. HOW DOES INDEX TRADING WORK?
Index trading relies on derivatives. Indeed, when you trade an index, there is no underlying asset that you can trade.
It is possible to trade indices in the form of ETFs that require a 100% margin, with derivatives (as futures) or, as Gravity Market does, through a CFD (Contract For Difference) that allows the use of leverage.
3. WHAT ARE THE ADVANTAGES OF TRADING INDICES?
Index trading offers many advantages that make this asset a popular choice among traders. The main advantages of trading indices are as follows :
• Trading an index is cheaper than trading individual stocks.
• A market in which one has the ability to trade on margin with the use of leverage
• Market with low transaction costs
• A market in which one can be in a buy or sell position
4. WHY TRADE INDICES WITH GRAVITY MARKET?
• 14 tradable indices
• Spreads from 0.5 point *
• Low VWAP spreads
• Leverage up to 1:200 **
• From 0.1 lot
• 0 Raw spread point
* On the S&P 500 Index
** Only for PRO account, other account 1:100*** for Standard and Active Trader account
*** Gravity Market reserves the right to reduce the levers when the risk taken by the user is too high.
5. THE SPREAD
The spread, also known as the bid-ask spread, is the difference between the price at which you can buy a product and the price at which you can sell it. The spread is given by the liquidity provider.
The broker can increase the spread in order to make money, but can also choose not to touch it and take a fixed commission separately. In the latter case, the spread is defined as a zero raw spread.
Gravity Market applies a zero raw spread : customer spreads are the market spreads for all accounts.
6. CONTRACT SIZES
In index CFD trading, 1 CFD lot represents 1 CFD contract. Thus, the fluctuation of an index CFD causes the index point to change.
The nominal value depends on the currency in which the index is quoted.
At Gravity Market, the value of one lot corresponds to the instrument in USD.
For example, to buy a mini lot (X0.1) of a Eurostoxx 50 CFD contract, if the index is at 3500 points it will cost 3500*0.1=350 EUR and you can buy it even cheaper with leverage.
In any case, if the index rises from 3,500 points to 3,520 points, you will have a profit or loss of 20 EUR depending on whether you have taken a buy or sell position on the contract.
Below is an example for the DOW JONES index with a quote of USD 25,000 :
7. THE COMMISSION
When the trader wants to place an order, he has to pay a commission to the broker on the face value of a lot.
For example, for a PRO account on the Eurostoxx 50, the trader will pay 1 USD for opening a position and will pay 1 USD for closing position, making a total of 2 USD.
8. MARGIN TRADING
When you trade in the index market, it is difficult to get a significant return on your investment with a small amount of capital.
To trade with leverage, the idea is to anticipate the margin required for the size of your trade.
Let us take the example of the Eurostoxx 50 CFD contract, assuming that you always put in EUR 350 of your capital. With a leverage of 1:30 you invest 30*350=10,500 EUR in total.
When the index rises to 3,520 points, you will have a profit or loss of 20*30=600 EUR*.
However, leverage does not only increase your potential gains but can also cause you to incur large losses that can sometimes exceed the capital available in your account. Therefore, it is best to start with transactions that do not use all your capital and with low leverage in order to get to know the market.
*Does not include commissions
9. THE SWAP
The SWAP (also called rollover) is an interest paid by the online broker's client for open positions from one day to the next. This interest rate is applied to any nominal amount whose trading position is open for more than 24 hours.
When you take a position on an index, you are in a way committing to sell or buy it back within the day. If this is not done, we exchange (swap) for a new day and the swap rate is applied to our position.
The swap varies according to several data :
• The online broker
• Type of position : buy or sell
• The negotiated instrument
• The number of days the position is open
• The nominal value of the position
The overnight swap rate depends on the 1-month interbank funding rate (e.g. LIBOR or EURIBOR) and the commission applied by the prime broker for the overnight swap.
A distinction must therefore be made between the rollover of a buy and sell position :
CFD rollover on purchase = prime broker's commission - interbank rate
Rollover CFD on sale = Prime broker's commission + interbank rate
It is therefore cheaper to maintain a position when selling than when buying. Here is the calculation of the swap in detail :
DFC = (V*R)/D
• DFC = Daily Finance Charge = Swap
• V = Notional value during closing
• R = Interest rate given by the liquidity provider
• D = Number of days. For the calculation 360 days is used for all indices except for AUD and GBP products where 365 days is used.
CFD products may be subject to dividend credits or debits depending on whether the position is a buy or sell position. The calculation formula used is :
Dividend amount of the index * Size of the position
If the position is still active at the close of the day before the dividends, then :
• Purchase positions are credited
• Put positions are debited
Other things to know :
• The rollover is calculated on the basis of the total value of a trade and not in relation to the margin used.
• Banks are closed on weekend, but they continue to charge interest. Gravity Market therefore charges three days of rollover on Friday night at closing.
• GER30 is not subject to dividends.
The VWAP (Volume-Weighted Average Price) is the price at which all orders have been executed, weighted by the volume of orders.
When we buy or sell a large volume of orders, there is no certainty that we will get all of our orders at the desired price. So to have a maximum chance of having a large volume of orders at the desired price, we must look to see if the broker has significant liquidity and therefore offers low VWAPs.
Note that the VWAP can also be used by traders as an intraday trend indicator (less than one day).
11. THE INDICES PROPOSED BY GRAVITY MARKET
12. COMMISSIONS PROPOSED BY GRAVITY MARKET
• Pricing and Trading starts every Sunday at 18:00 (US) Eastern Time (GMT -4:00).
• Pricing and Trading ends every Friday at 16:55 (US) Eastern Time (GMT -4:00).
• System Daily Break Time is from 16:55 to 17:10 (US) Eastern Time (GMT -4:00)
• There is an exception for the USBKT: Pricing and Trading of this index starts every Sunday at 20:15 and ends every Friday at 16:45 and the Daily Break Time system is from 16:45 to 20:15 (US) Eastern Time (GMT -4:00).
¹ In a trade you place one order to buy an asset and a second order to sell it.