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While real estate and entrepreneurial ventures are often the go-to options for generational wealth, trading indices is also something investors can pursue.
What is indices trading?
Before elaborating on indices trading, one must first understand what an index is. In the context of financial markets and trading, an index refers to a group of stocks that investors have the opportunity to grow their wealth through. An index measures the value of the group of stocks as a whole, and is not solely based on the performance of one particular company. Therefore, the average value of the group’s stocks determines the performance and success or failure of the index. Some of the most known and widely recognised indices are the FTSE 100, Nasdaq 100 and S&P 500. These are associated with the 100 largest companies listed on the London Stock Exchange, 100 largest and most actively traded US companies, and the 500 largest corporations by market capitalization listed on the New York Stock Exchange or Nasdaq Composite.
Indices trading as a source of income
When it comes to getting started with indices trading, it can definitely be daunting at first. However, for those with some experience and a basic understanding of forex or stock trading, it may be the most natural next step to take. As a first step, it is advised to get started through trading Contracts For Difference, or CFDs, which allow you to speculate on the price movement. However, CFDs do not give you actual ownership of any asset, as the transaction is primarily based on the difference between the current value of the asset and its value when the contract expires.
There are primarily two ways of trading CFDs; Index Cash CFDs and Index Futures CFDs. Index Cash CFDs are often for short-term traders as they are based on spot prices. CFD traders also generally do not maintain a position overnight, as a way to avoid paying overnight trading charges. Index Futures CFDs, on the other hand, are most popular amongst medium to long-term traders. Index Futures which are based on agreed upon future value, include the overnight funding charges in the wider spreads. This is not the case with Cash Indices as they have much tighter spreads.
The flexibility and investment period options offered by indices trading provide comfort for both singles and couples, as they have the comfort of choosing an option that works best for them. Moreover, families can also make their trading decisions after determining what resources they have at their disposal, how much can be allocated to trading and for how long, as well as understanding the risk appetite and their ultimate trading goal. The benefits of this is that the accumulated wealth can also be passed down to future generations and be a considerable amount at the time, given the impact of compound interest.
The importance of diversifying
When it comes to investing and accumulating long-term and generational wealth for your family, some of the first investment options that come to mind are real estate, cash investments in regular bank accounts or forex trading. However, because there are multiple investment options, experts often advise diversifying and not solely depending on one form of investment, no matter how promising that single investment is. Diversification can be viewed as a way to reduce risk by spreading it across your portfolio. Simply put, it is about investing in different options and seeing how each one reacts to certain conditions. While one might be adversely affected by unprecedented conditions, the other might unexpectedly benefit from it. With that in mind, it is a way of indirectly offsetting the losses against the gains or profits, if any, which is why diversification is championed by those in the know.
Author
Jonathan Liebenberg
Bio: Jonathan is a technocrat and an avid outdoor enthusiast. When he isn’t working to make the internet a better place, Jonathan can be found exploring the great outdoors and beautiful coastlines with his sidekick, Zen, a very energetic Weimaraner.
