What Are The Pros And Cons Of Indices Trading?

  • by Money Life Research
What Are The Pros And Cons Of Indices Trading?


What is index trading?

Index options are the common trading options in the financial trading markets. They are traded in the market as financial derivatives. Index trading is based on stock indices. Index options are settled in terms of cash and not as a transfer of assets. In index trading, a group of stocks make up the index and are measured for their value for a section of the stock market.

What are the advantages of stock trading indices?

Stock indexes are interesting alternatives available in the financial markets. Some of the advantages of trading indices in the financial trading markets are as follows:

  • Indices can be traded as per the movement of the stock market.
  • Indices can be traded under different ranges of strategies.
  • Different periods can be chosen to trade indices.
  • Manipulation of price is very minimal.
  • Trading indices is like trading in established markets.
  • The facility of long-term trading is enabled by indices trading.

What are the disadvantages of stock trading indices?

Some of the disadvantages of trading indices in the financial trading markets are as follows:

  • When indices are less traded, it still involves high brokerage fees.
  • Indices trading hours are limited and cannot be traded 24 hours a day.
  • The stock markets facilitate Indices trading only during local business hours.
  • When profits from the stock trading indices are shown as capital gains, it is considered as short-term capital gains and taxed at the highest applicable rate.
  • Some stock indices are less liquid when compared to other markets in the financial trading space.

Index trading options and Stock options Vs Futures:

A price is set today for a commodity or security for future trade. Futures are derivatives that involve an exchange where contracts lock in the delivery of a commodity or security. The position of the market defines if being involved in buying or selling of the futures is advisable or not. The position for the futures is leveraged with a minimal margin at the initial stages.

Profit and loss of trading can be ascertained when trading depends on the long term or short term. Options are made available to those involved in trading the futures. A call option is made available when buying is enabled without obligation and a put option is made available when selling is enabled without obligation. Options are available on the stock trading indices where derivatives of the stock market permit trading options. Options are made available on the individual stocks too.

Index trading options and Stock options are based on the stock which is the underlying security. Options are considered as a derivative form of investment. On the other hand, a futures contract is an obligation to buy or sell an asset at a future date for a price that is agreed now.

Final Notes:

It is difficult to ascertain whether Index trading options and Stock options are better or worse. It is important for traders to have an understanding of the pros and cons of stock trading indices before they participate in the transactions.

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