Should I Trade Indices or Stocks?

5 mins read

If you’ve recently been tempted by the idea of entering the world’s financial markets, the chances are that you’ll have been initially attracted by forex trading.

After all, this entity boasts daily trading volumes of $6.6 trillion, while the forex market is renowned for its inflated leverage, innate volatility and high levels of liquidity.

However, trading indices or stocks also offer significant advantages to investors, regardless of their outlook or wider trading strategy. But should you prioritise indices or stocks in the current marketplace? Here are some of the key considerations.

  1. Volatility

While the forex market is considered to be one of the world’s most volatile financial entities, both stocks and indices offer similar opportunities when it comes to profiting from short-term price movements.

Historic market analysis has shown that stocks offer higher levels of volatility, making them a more favourable option amongst day traders and scalpers.

For example, even blue-chip shares such as Apple have experienced volatility levels that were twice as high as the Dow Jones index over the course of the last 12 months, although it’s fair to say that such price movements have been exacerbated by the impact of the coronavirus pandemic.

Although it’s also possible to leverage volatility in indices trading through investment vehicles such as spread bets and CFDs, this practice is less appealing to speculators and investors with a decidedly short-term outlook.

  1. Margin and Leverage

These terms are widely used in the financial market and in relation to both stock and indices trading, with leverage referring to the process of taking on debt and opening positions that are far larger than your initial deposit.

Conversely, margin is the debt or amount of capital borrowed from a broker, and in this respect it creates the leverage necessary to open your desired positions.

Of course, the less leverage that you use, the lower the risk you’ll incur as a trader, especially as it’s possible to both lose and gain more than your initial deposit depending on how the market fares. Stocks and indices are both superior to forex in this respect, as they offer lower leverage and require the most amount of margin to trade.

Overall, stocks require the most amount of margin to trade, while indices provide a healthy compromise between the available leverage and overall account size. This arguably makes indices a better option amongst new traders from the perspective of leverage.

  1. Liquidity

We close with liquidity, which essentially refers to the ease with which assets can be bought and sold in the real-time marketplace. This is an important consideration, particularly during times of market tumult when you require flexibility in terms of how and when you trade.

In this respect, forex boasts the highest level of liquidity, with stocks and indexes nowhere near the currency market. However, this shouldn’t deter you from trading these asset classes, as only cheap penny stocks will be noticeably affected by an underlying lack of liquidity.

In fact, you can trade individual stocks and indices with a level of liquidity that is more than enough to operate comfortably, although the latter may be preferable if you want to optimise exposure as a way of offsetting any inflexibility in the marketplace.

This is because indices can offer access to a host of blue-chip stocks within a particular country or industry, providing a natural level of diversification and optimising liquidity in the process.

Oliver Robey Bio

My name is Oliver and I currently work for a digital marketing agency in the U.K. I have wealth of experience within the digital marketing world and have previously worked for a Premier League football club. I am a keen traveller and have friends across the U.S.A that I visit on a yearly basis. My goal is to one day manage m own team within a digital marketing agency and be a driver of innovation.

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