Trading indices vs forex: what are the main differences and what can you trade?

Trading indices vs trading forex

Trading indices and forex are two of the most popular ways that you can get exposure to the financial markets. Indices trading focuses on tracking the performance of a group of stocks, while forex trading looks at the exchange value when buying one currency and selling another.

When trading indices, you’d get exposure to a basket of stocks or sectors in a single position. Each index comprises of a certain number of stocks, depending on how it's weighted. Some indices are market cap weighted, while others are price weighted.

With us, you can trade major indices like the FTSE 100, Dow Jones (Wall Street) or Nasdaq (US Tech 100).

With forex trading, you’ll buy one currency and sell another on the foreign exchange market. If you buy a currency pair, you’ll hope that the base (the first currency listed in a forex pair) appreciates, and if you sell, you’d expect the base to depreciate. The more times a currency is traded every day, the more volatile the price of other currencies become.

With us, you can trade on over 80 pairs, with a range of major, minor and exotic currency pairs to choose from. Some of the most popular currency pairs include the British pound against the US dollar (GBP/USD), the euro against the US dollar (EUR/USD), and the US dollar against the Japanese yen (USD/JPY).

These are very liquid markets, providing traders with more opportunities to get exposure and take advantage of the spread. In the same breath, there’s risk of possible loss if the market moves against them.

With us, you’ll speculate on both markets using CFD trading.

Trading indices vs forex: which market is better for beginners?

It depends on several factors, but most beginners tend to get exposure to indices at the start of their journey as forex is more suited for experienced traders. This is because the indices market follows the direction of stocks closely, making it slightly predictive of how the index will move in the future.

For example, during Covid-19, there was a large drop in most sectors as a result of the lockdown before they saw a rebound. One of those markets affected were tech stocks, which proved to be resilient during the period. If you took a long position on the NASDAQ 100 Tech Index (US Tech 100), which contains the 100 largest US tech stocks, you probably would’ve made a profit during that period.

Generally, indices are a natural next step for people who deal shares. This is because when you trade indices you get exposure to several stocks through a single position. Additionally, you can also invest in index ETFs, but trading is more liquid and based on the real underlying price.

Note that with more liquidity, lies the risk that traders will not be able to buy or sell an asset on time without negatively affecting the price of the asset.

Some of the factors that affect an index’s price include big events like interest rate decisions, a country’s economic performance and many others. This is why it’s prudent to use fundamental analysis to support your decision to take a particular position.

Forex trading tends to be the preferred market by experienced traders, as it is more complex in comparison to indices trading. You must ensure that you know how to trade forex, have a good grasp of the method you’re going to use and a solid trading strategy before you get exposure.

As a beginner, it's important to supplement your knowledge before you start trading with real money. You can use IG Academy – a self-learning hub, complete with comprehensive trading resources – to help you learn at your own pace.

Beginners are encouraged to open a demo account thereafter. This is a simulated market environment that aims to recreate the experience of ‘real’ trading as closely as possible.

You’ll get a feel for how different products and financial markets work without the risk of losing any real money, so that you can explore and experiment using different trading strategies with confidence.

When you open a demo account with us, you’ll be given immediate access to a version of our online platform, along with a pre-set balance of $10,000 and R1,000,000 in virtual funds to practise with. Once you’ve gained enough confidence and you’re familiar with trading on the platform, you can decide to upgrade to a live account.

What are the ways to trade indices and forex?

With us, you’ll trade indices and forex pairs using CFDs:

Indices trading

You can get exposure using CFDs and trade on the spot (cash) price if you have a short-term outlook or use futures and options to take a long-term position. With CFDs, you can hedge your position and offset the loss you incurred against future profits for capital gains tax (CGT) purposes¹

Forex trading

CFD trading on forex involves buying and selling contracts to exchange the difference on price from the point at which the contract is opened, to when it’s closed. Additionally, CFDs are popular because they’re also leveraged,* and you can offset any losses against profits for CGT purposes¹

Discover more about CFD trading forex

Forex trading vs indices trading: key similarities and differences

Explore the benefits and risks of trading forex and indices while looking at why you’d choose one over another:

Forex trading vs indices trading: key similarities

• Liquidity – these are two of the most liquid asset classes available in the market, with forex experiencing trillions of dollars’ worth of transactions every day and indices also exhibiting a staggering figure
• Spreads – index and forex prices tend to have tight spreads, which makes it ideal for day traders that want to get exposure in the short term
• Economic news and events – index and forex fluctuations tend to be a reflection of the reported economic health of a region they represent
• Leveraged products – both markets can be traded on leverage, enabling you to open a position by paying just a small fraction of the full value of the position upfront. Note that your profit or loss will be calculated based on the full position size, not your deposit amount. This means that you should take steps to manage your risk effectively

Forex trading vs indices trading: main differences

• Range of markets available – forex trading involves buying and selling currency pairs in three categories (major, minor and exotic). With indices, there are far more index funds that you can get exposure to
• Type of asset class – indices trading involves speculating on the performance of a group of stocks rising or falling while forex focuses on currency conversions
• Volatility – indices tend to experience much more volatility than trading forex, often moving more points per day than currencies. These sharp, unpredictable movements can be triggered by world events or factors unique to one sector. With us, you can minimise your risk, even in volatile market conditions, by using our range of risk management tools²

Trading indices vs forex summed up

• Indices trading involves speculating on the performance of a sector or economy while forex trading focuses on buying and selling currencies
• Beginners typically trade indices at the start of their trading journey instead of forex because they tend to be more predictable based on how stocks and the economic health of a country is
• With us, you’ll trade indices and forex pairs via CFD trading
• You can trade indices and forex on the spot market price if you have a short-term outlook, or choose futures or options if you have a long-term outlook
• Some of the similarities between trading indices and forex include high liquidity, tight spreads, and influence from macroeconomics
• The differences between forex and index trading include volatility, range of markets available and the type of asset class

Footnotes
* Note that despite only paying a small percentage of the full trade’s value upfront, your total profit or loss will be calculated based on the full position size, not your deposit amount. This means that you should take necessary steps to manage your risk effectively.
¹ Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
² Forextime, 2022