Index investing has grown in popularity among investors in recent years. As a result of this growing demand from investors, a more significant number of index-linked exchange-traded funds (ETFs) have been created.
To avoid being left out, more traders are now investigating ways to trade indices. Indices, like stocks, forex, and commodities, can be traded and invested in.
Period of Holding – Indices Trading vs. Investing
One of the primary distinctions between trading and investing is the time in which traders and investors intend to hold their investments.
The objective is typically to invest today for investors, hoping that the investment will appreciate over time. The holding period for the indices can range from a few years to ten or more years.
When traders engage in trading, they adopt the mindset that prices will always fluctuate. A trader’s objective is to benefit from effectively catching market movements over a brief period, whether minutes, days or weeks.
In comparison to saving, traders will either go long (buying indices in anticipation of future price increases) or short (selling indices in the expectation of future price declines) (dealing the index with the expectation that price will decline). Successful index traders can profit regardless of market conditions.
Ownership Of The Underlying Assets
Another significant distinction between investing in and trading an index is who owns the underlying index.
Unlike investing in index-linked exchange-traded funds (ETFs) such as the Nikko AM Straits Times Index (STI) ETF, you may have the underlying assets while buying indexes not own the underlying assets.
That is since traders usually use an index CFD when trading indices. Index CFDs enable traders to gain exposure to their preferred indexes while still allowing them to exchange both long and short positions in the sector without investing in the underlying commodity.
IG is a reputable broker that offers links to more than 30 indices globally. They provide traders with links to various indices markets, including the US Tech 100, equivalent to the NASDAQ, the Hong Kong HS50, which is equal to the Hang Seng Index, and the Singapore Index, similar to the STI.
When it comes to investing, the majority of traders, if not all, would use a kind of leverage. The explanation for this is straightforward: when leveraging is appropriately used, traders will raise their earnings without spending a lot of money.
For instance, a trader who deposits $5,000 will exploit up to 20 times his capital (i.e., $100,000) if he trades IG’s Singapore Index. If he reaches a $50,000 place for his trade, a 1% rise ($500) in the Singapore Index results in a 10% return on his initial capital ($500/$5,000).
Naturally, leverage is a two-edged weapon. When the price turns toward a trader’s advantage, the trader’s losses are magnified accordingly. This is why traders must first learn how to defend themselves before they begin trading.
This contrasts with borrowing, where most buyers usually spend only with the capital they already own, without using any leverage.