You can’t buy the index itself, so your provider builds a price instead of quoting one from an exchange. This page explains what an index CFD tracks. It covers how cash and futures contracts differ, how dividends reach your trade, when the contracts trade and why risk bunches up around the market open.
Key points
- An index CFD tracks the price your provider sets for an index. The provider builds that price from the futures contract. The provider then adjusts it for interest and dividends, so it isn’t the index itself.
- Cash index CFDs do not expire and include a daily financing charge. Futures-based index CFDs expire and are rolled over to the next contract, with the financing built into the price difference.
- On a cash index CFD, your provider makes a cash adjustment on the ex-dividend date when companies in the index pay dividends. It credits buy trades and charges any short position, a trade that gains when the price falls. Futures-based contracts need no adjustment because the futures price already allows for expected dividends.
- When the company that opens your account is regulated in the EU or the UK, retail traders’ leverage is capped. ESMA and the FCA set the cap at 20:1 on major indices and 10:1 on other indices (ESMA press release, 27 March 2018, FCA PS19/18).
- Index prices jump, or gap, when the stock market underneath opens. Holding a trade through the open exposes you to gap risk: the chance of a sudden jump that skips right past your exit price. No ordinary stop can remove that risk.
What an index CFD tracks
An index CFD tracks the price your provider calculates for a stock index. Most often the provider starts from the front-month futures contract on that index. The front-month futures contract is the one that expires soonest. The provider then adjusts for interest and dividends between today and the futures expiry, so while the market is open the CFD tracks the cash index.
Your provider keeps quoting even when the stock market underneath is closed. It uses the futures contract where that trades and its own model where it doesn’t. That’s why an index CFD can move overnight while the shares in the index aren’t trading at all.
The contract specification from your provider tells you the index a contract follows, along with its multiplier, how much a single index point is worth. It also states the trading hours and the expiry rules. Even for the same index, two providers’ contracts can vary on the other three.
Like every CFD, an index CFD is traded over the counter, directly with your provider and not on an exchange. So your counterparty, the other side of your trade, is the provider and not the exchange where the futures trade (what are CFDs). Index names are trademarks of the companies that own the indices. For that reason, providers often give their contracts generic names built from the country and the number of companies in the index.
Cash contracts, futures contracts and the roll
There are two types of index CFD: cash contracts and futures contracts. They differ in when they expire, how financing is paid and how their prices relate to the index.
Cash index CFDs
A cash index CFD tracks the current level of the index and has no expiry date. You pay a daily financing charge on the full notional value, the total value of the trade, just as you would on a share CFD (costs and fees). The price of a cash index CFD stays close to the index level during market hours, and most retail clients, meaning ordinary individual traders, trade this kind for that reason. You’ll see the cost of holding it as a separate financing line on your statement.
Futures-based index CFDs
A futures-based index CFD follows a single futures contract and expires on the same date. There’s no daily financing charge, since the cost of holding is already reflected in the difference between the futures price and the cash index. That difference, known as the basis, narrows towards zero as expiry approaches. So holding to expiry means you pay the cost through the price instead of through a separate charge. Your provider usually makes up for the absent financing by widening the spread, the gap between its buy and sell prices.
The roll
The roll moves a futures-based trade from the expiring contract to the next one. Your provider may do this automatically for you. You can also close the old trade and open a new one yourself. The next contract trades at a different price, so the roll comes with a cash adjustment equal to the difference. That adjustment is credited or charged so you neither gain nor lose from the switch itself. You do pay a spread on the new contract, though. Why the price gap between contracts can be large is explained on the commodities trading page.
Dividend adjustments on index CFDs
When you trade an index CFD, dividend adjustments mirror what happens when the companies in the index pay dividends. The ex-dividend date for a company is the first day its shares change hands without the buyer getting the next dividend. On that date the cash index drops by the dividend amount, weighted according to that company’s weighting in the index.
The index’s real value hasn’t moved, yet the price is lower. If your provider quoted the cash index without adjusting for that, short positions would get a windfall and buy trades a loss. So, on the ex-dividend date and before the market opens, the provider credits buy trades and charges short positions with the dividend’s value in index points. Futures-based contracts need no adjustment, because expected dividends are already priced into the futures.
You’ll see the adjustment as a cash entry on your statement. On an index with many companies there can be one on most days of dividend season, and a short position held through that season pays every one of them. The shares and crypto CFDs page explains how this works for a single share.
The main index contracts and when they trade
The main index contracts offered as CFDs cover the large developed markets. Each index contract has a cash session, during which the shares in the index trade (trading hours). Each index contract also has an extended session, when your provider quotes from futures or from its own model.
| Index group | Cash session | Extended quoting | Retail cap |
|---|---|---|---|
| US large-cap and technology indices | US stock market hours | Nearly round the clock on weekdays, from futures | 20:1 (major) |
| UK, German, French and pan-European indices | European stock market hours | Evenings and early mornings, from futures | 20:1 (major) |
| Japanese and Australian indices | Asia-Pacific stock market hours | Overnight, from futures | 20:1 (major) |
| Smaller and emerging-market indices | Local market hours | Limited or none | 10:1 (non-major) |
| Sector and mid-cap indices | Local market hours | Limited or none | 10:1 (non-major) |
The list of indices that count as major is written into the EU rules. A company regulated in the EU can’t make an index major by calling it that (ESMA Decision (EU) 2018/796).
Gap risk around the open
The biggest risk of holding an index CFD is gap risk around the open. The stock market shuts overnight and at weekends, yet news still arrives during that time. If something happens while the market is closed, an index can open several per cent away from where it closed.
Your provider does keep quoting overnight from futures, but those futures gap when they reopen too. With little liquidity through the night, you have few buyers and sellers to close your trade against. A stop-loss is an order to close your trade at a set price. That order fills at the first available price on the other side of the gap (how a trade works).
Weekend gaps are the largest. That happens because two days of news arrive at once. Weekend gaps get priced when the futures reopen on Sunday evening. The risk management page weighs up the choices: a smaller trade or not holding through the weekend at all.
Costs that are specific to index CFDs
Costs on index CFDs differ from those on a share CFD in several ways, and a fair cost comparison includes all of those differences.
- Spread in points
- The spread on an index CFD is quoted in index points. The cost is the number of points multiplied by your trade size per point. For example, a one-point spread on a trade of ten per point costs ten, and that covers both opening and closing the trade.
- Financing on the cash contract
- Each day you hold a cash index CFD, you pay a financing charge on its full notional value. The rate combines a benchmark rate for the index’s currency with your provider’s mark-up. That daily cost is what makes a cash contract expensive to keep open for weeks (costs and fees).
- Overnight and weekend spreads
- Overnight and weekend spreads for index CFDs are wider than the daytime spread, and sometimes several times wider. During these times, your provider is using futures or a model to set the quote, as there is no live stock market supporting the price.
- Dividend adjustments on shorts
- Dividend adjustments are charged to short positions on each ex-dividend date and credited to buy trades on each ex-dividend date. They aren’t a fee and they aren’t a profit. They correct for a price drop that says nothing about what the index is worth.
- Roll on futures contracts
- Each roll on a futures-based contract costs you a spread on the new contract. The difference between the two contracts is also something you bear through the price, not as a separate charge.
Risk warning
An index CFD held overnight is exposed to a market that is closed
An index CFD held overnight is exposed to a closed market. While the shares in the index can’t trade, your trade moves with futures and your provider’s model. When the market reopens, it prices in the night’s news in one step. At an EU or UK company, a 20:1 retail cap applies to major indices. At that cap, a 5 % gap at the open against your trade wipes out all your margin (ESMA Decision (EU) 2018/796). Margin is the deposit your provider holds to back the trade.
Common questions about indices trading
Common questions about indices trading cover what an index is, plus how and when the best-known ones are traded.
What are indices in trading?
Indices in trading are numbers that track the combined share prices of a group of companies, for example the biggest companies listed in one country. The index goes up when those shares, on average, go up. You can’t buy an index itself, so people trade it through products that follow it, such as futures, funds and CFDs.
What is indices trading?
Indices trading means deciding whether a stock index is going to go up or down. With a CFD, you never own the shares that make up the index and you gain or lose a fixed sum for each point it moves.
How does trading the Nasdaq or the Dax work with a CFD?
Trading the Nasdaq 100 or the Dax 40 as a CFD is no different from any other index CFD. You choose a size per point and decide whether to go long or short. The Nasdaq 100 tracks big companies listed on the Nasdaq exchange in the United States, while the Dax 40 tracks big German companies. Providers often give them generic labels like US 100 and Germany 40, and the Dow Jones index often shows up as US 30.
What are the trading hours for indices?
Trading hours for an index CFD stretch beyond the hours of the stock exchange behind it. Most providers keep quoting the major indices from futures through the evening and night on weekdays, while the shares trade only during the exchange’s session. For when each exchange opens and closes, see the trading hours page.
Sources
The original documents this page cites, in the order they first appear.
- European Securities and Markets Authority, ESMA
- Financial Conduct Authority, FCA
- ESMA agrees to prohibit binary options and restrict CFDs to protect retail investors, ESMA, 2018-03-27
- PS19/18: Restricting contract for difference products sold to retail clients, FCA, 2019-07-01
- ESMA Decision (EU) 2018/796 of 22 May 2018 to temporarily restrict contracts for differences in the Union, Official Journal of the European Union (EUR-Lex), 2018-05-22