Sign In   Register


Different ways you can trade the S&P500 index

Investing SP500 Index

The S&P500 index, also known as the Standard and Poors’ 500 Index is one of the three major equity indexes in the United States. As the world’s largest economy, the index is closely watched, not just in the U.S. but by investors all across the world.

If you want to know the health of the U.S. economy and thus by extension, the health of the global economy, look no further than the U.S. equity indexes. As traders, you have the flexibility to trade the S&P500 index in different ways.

But before we get into the different ways you can trade the S&P500 index, let’s first understand the characteristics of the S&P500 index.

What is the S&P500 index?

The S&P500 index is an equity index which comprises of the top 500 blue chip companies. The companies under the S&P500 index need to meet a certain criterion such as the market capitalization in order to be considered for listing on the index.

The S&P500 index is in itself a capitalization weighted index. In other words, the individual weightage of the stocks in the S&P500 are based on their market capital.

For example, a company such as Apple Inc. (APPL) has a market capitalization of 1.3 trillion dollars. Similarly, Accenture PLC (ACN) has a market cap of 135 billion.

Both these companies are listed on the S&P500 index. But if you look at the weightage, Apple Inc. has a over 3% weightage compared to Accenture PLC’s 0.5% weightage.

The S&P500, due to its large composition is often seen as the best representation of the U.S. economy. Typically, the index rises during an economic boom. This happens as investors prefer riskier assets (such as equities).

Likewise, during an economic bust cycle, the S&P500 index tends to fall. This happens as investors prefer less risky assets such as bonds or gold.

Why is the S&P500 index so important?

The index is closely monitored by a number of market participants including the Federal Reserve Bank. Many hedge funds peg their performance to the S&P500. A hedge fund is often considered good if it is able to beat the annual returns of the index.

Besides hedge funds, many other types of investors such as mutual funds, individual traders and so on also keep a close watch. Quite often, a simple investing strategy is to invest in the S&P500 index.

Since 1970’s the index has posted declines only 12 times, and just once, closed flat for the year. To put this in perspective, the index showed negative returns just 12 times out of 49. Which is about 25% for the period calculated.

As retail traders, you can also invest in the S&P500 index. There are numerous ways to do this, depending on the capital you have and the broker you choose. In the next section, we will take a look at the different ways to invest or trade the S&P500 index.

Different ways to trade the S&P500 index

The S&P500 is basically an index. In other words, it is not an instrument. The index basically shows the overall performance of the 500 stocks included in the index.

Therefore, in order to directly trade the S&P500, there are different ways to go about them. As you might have guessed, trading the S&P500 is basically trading its derivative. In other words, you can trade an instrument whose exposure is based on the underlying index.

S&P500 Index Futures: The S&P500 index futures are offered by the CME group. You can look to any futures brokers to gain exposure to the S&P500 index futures. Within the futures market, you can trade the actual index (which means you will need to have higher collateral) or you can trade the mini or even the micro contracts.

For example, an S&P500 micro contract requires a margin of just $500 if you trade intraday. Keeping your positions open overnight will automatically result in higher margin requirements.

S&P500 Index Options: Using options, you can also invest in the S&P500 index. The advantage here is that your collateral is much lower and you are under no obligation to take delivery of the underlying index.

S&P500 index options can be bought from an options broker only. Here, you simply pay the premium (if you are buying the option) and you can only exercise your right if the option closes in the money. You can of course buy both CALL and PUT options.

A variable of the index options is what is called as the Volatility Index or VIX, which is often known as the fear index. The VIX is basically made up of the total number of CALLs and PUTs in the market.

S&P500 Index CFD: CFD contracts also work similar to futures. The only difference here is that they can be highly leveraged. Thus, with a 1:100 or even 1:200 leverage you can trade the S&P500 index. Keeping positions overnight will result in some overnight fees and charges.

If your forex broker offers index trading such as S&P500, chances are that they are CFD contracts. Unlike futures, you do not have to rollover your contract every three months.

The above article gives a basic outline of the S&P500 index, which should give the reader the basic understanding of how to invest or trade in the S&P500 index market.

Read 1303 times Last modified on Tuesday, 14 January 2020 11:38