Indices
An index tracks a market. Owning it (via an ETF) and trading it (via a CFD or future) are two very different things with very different risk.
An index like the DAX or the S&P 500 isn't a product itself, it's a calculated figure: a basket of stocks summed up into a single number. The DAX tracks Germany's forty largest companies, the S&P 500 the five hundred largest US companies.
You can't buy an index directly. There are two very different ways to get close to one. First, an index ETF, which actually holds or replicates the underlying stocks. You end up with an economic stake in all those companies, with the protections that ring-fenced fund assets offer.
Second, an index CFD or future: a pure bet on the price level, usually leveraged, with none of it actually belonging to you. The provider is your counterparty, not a portfolio full of stocks.
These two paths get confused all the time, but they're fundamentally different: one is long-term investing, the other is trading with all the risks that come with it, including liquidation.
Most major indices are weighted by market capitalization: the bigger the company, the more it drives the index's overall movement. In heavily concentrated indices, a handful of heavyweights can end up accounting for a disproportionate share of the total move, which limits the diversification you'd expect from "500 companies" in practice. The Dow Jones is a historical exception: it's price-weighted, not market-cap-weighted, which makes it methodologically inconsistent but still widely followed out of tradition.
Index CFDs and futures don't trade at exactly the same level as the underlying index, they carry a premium or discount that prices in, among other things, expected dividends and financing costs. For futures, that gap is called the basis and disappears at expiry. For CFDs on indices, much like forex and perpetuals, ongoing overnight financing charges apply, which can meaningfully raise the cost of holding a leveraged position over the long term.
An often-overlooked effect is rebalancing: indices are periodically reconstituted, companies drop out, others get added. For an ETF tracking the index, that means automatic reshuffling and the trading costs that come with it, causing the fund's return to deviate slightly but systematically from the pure index calculation.
Summary
- An index is a calculated figure, not a product you can buy directly.
- An ETF means owning the underlying assets, a CFD or future means a leveraged bet against them.
- Market-cap weighting lets a handful of heavyweights dominate the index.
Did you get it?
Can you buy an index directly?
No. You either track it through an ETF that actually holds the underlying assets, or trade a bet on its price via a CFD or future without owning anything.
What's the key difference between an ETF and an index CFD?
The ETF belongs to you and is ring-fenced fund assets. The CFD is a contract with the provider, usually leveraged, with ongoing financing costs.
Why do individual indices move so differently in size?
Because of weighting. In market-cap-weighted indices, a handful of very large companies drive a disproportionate share of the movement.
Check your understanding
Related
- What an ETF isStage 0
- CFDs, and why regulators warn about themTrading
- DiversificationStage 4