Index trading is a powerful approach to investing. It’s gaining traction among property investors, making a dynamic addition to any portfolio and providing certainty through market fluctuations.

As an excellent starting point in diversification, index trading provides an opportunity to harness the wider performance of a group of assets. If you’re looking for a resilient investment strategy, index trading may help you to build one.

Below, we’ve covered the basics of index trading and how it could become a valuable addition to your investment strategy.

Understanding index trading

Index trading differs from individual stock trading, despite some overlap and similarities.

It involves buying and selling indices, a collection of stocks that each represent a segment of the financial market. Indices are frequently seen as economic indicators, and a few of the most popular in the UK include:

• FTSE 100: This index represents the biggest 100 companies listed on the London Stock Exchange according to market share.

• FTSE 250: Similarly, this index features the next 250 largest companies after the FTSE, making it a valuable reflection of the domestic economy.  

• FTSE All-Share: This is a comprehensive index encompassing all companies listed on the London Stock Exchange’s primary market.

Instead of buying individual stocks, index trading means you buy shares of a fund. This will mirror a specific market index and hold a small part of each stock within it. In turn, your investment will follow the overall benchmarked performance of the whole index, spreading risk and facilitating management.

Benefits of diversification

Diversification is highly important for property investors. In mitigating risk and stabilising returns, it can be invaluable to securing future success and reliability.

In the early stages of diversification, traders discover that index trading can serve as a complementary investment to property. With a balanced portfolio, investment can be spread across multiple companies, which reduces the impact if one underperforms. For investors who have most of their capital tied up in real estate, diversification is massively beneficial.

When index trading is leveraged in a property-heavy investment strategy, this level of balance provides an effective hedge against market fluctuations within the property sector.

Strategies for successful index trading

1. Trend trading

One of the simplest strategies to navigate, this involves predicting the market direction and capitalising on spikes and patterns. This is a form of passive trading.

2. Rebalancing

A popular form of active trading, rebalancing means periodically adjusting your portfolio to sell overperforming assets and buy underperforming ones. This optimises returns and mitigates risk.

3. Trading reversals

This is changing the fundamental direction of an index’s price for a set period. During an uptrend, the price of an index would rise and fall within a higher range. A reversal would mean a prevailing downward trend, with subsequent lower highs and lower lows.

Getting started with index trading

For traders already familiar with property investment, getting started is relatively simple.

• Firstly, you’ll need to choose a reliable trading platform covering a wide range of different indices. It should be user-friendly and must provide you with the right tools for effective and streamlined market analysis.

• Next, open a trading account and deposit funds. You’ll need to open a trading account and deposit funds.

Once you’ve opened an account, key steps include understanding fees and contractual terms, and finally selecting suitable indices. Regardless of experience in the property sector, traders should always try to be informed about market trends and current economic indicators.