Index CFDs have become popular because although similar to futures they can be traded in smaller size.

For example, the FTSE 100 index future traded on Euronext is priced at £10 a point. But a FTSE 100 CFD can be traded for as little as £1 a point. Trading in smaller size is often important because it gives the trader flexibility.

• If you were to buy 1 FTSE future then you're either in the market or out in that you can't sell 50% of the position to take a part profit or start to reduce losses
  
  
• But trade £10 a point of FTSE CFDs and you can part liquidate the position in stages, perhaps selling £2 a point (to reduce the overall trade to £8 a point) before selling £3 a point etc
  
  
• This flexibility is a key feature of Index CFDs

If you understand the principles behind an Equity CFD, then you understand an Index CFD because they work in exactly the same fashion. Index CFDs however offer even more leverage with 5% being the standard amount for deposit margin.

Also most CFD brokers charge zero commission on index CFDs as they make their money on the bid-offer spread. This in a similar fashion to how a market-maker works.

Pairs Trading using Index CFDs

Pairs Trading can also be done with Index CFDs.

• A Pairs trader might go long the FTSE 100 and sell short the German DAX 30, in anticipation the UK stockmarket will outperform the German stockmarket
  
• A common Pairs trade is also the FTSE 100 versus the FTSE 250
  
  
• Remember with pairs trading you're not trading the overall direction of the market, rather the relationship between two indexes, sectors or stocks
  
  
• Pairs trading is discussed in more detail in the Spread Betting section