Fundamental Analysis for Indices: A Beginner’s Guide

Index selection doesn't have to be complicated. You need to learn and master how to choose the best index that will support you in achieving your financial goals.

This article will provide you with the essentials of fundamental analysis and the steps of trading indices in a CFD platform.

Indices trading using a fundamental analysis

Fundamental analysis aims to determine an index’s intrinsic value without considering market value or sentiment.

The value of indices can be specified using the economic, sector, and company analysis, which are vital components in fundamental analysis.

Some examples of these components that experienced traders use in index trading are financial statements, industry trends, and market releases. You will acquire additional insights into these topics in the later section of this article.

The specified value of indices brought by completing a fundamental analysis will serve as a reliable reference point to guide you in your trading activities and help you make calculated moves in trading.

Difference between fundamental and technical analysis

Fundamental analysis and technical analysis represent distinct approaches to indices trading.

In technical analysis, traders focus on identifying opportunities through statistical trends, such as analyzing price movements and trading volumes.

Technical traders do not endeavor to assess the intrinsic value of an index. Instead, they rely on trading charts to detect patterns and trends that offer insights into an index's future behavior.

On the other hand, fundamental traders delve into various aspects, ranging from the broader economic and industry conditions to individual companies' financial health and managerial competence.

3 major components of fundamental analysis

The three primary components of fundamental analysis are economic, industry, and company analysis.

1. Economic analysis

Economic indicators provide insights into an economy’s overall health and direction. A country’s financial performance can influence the profitability of companies making up an index.

You can closely monitor these indicators to make informed decisions when buying, selling, or holding indices positions. The insights you acquire can then be used to adjust your investment strategy accordingly and potentially maximize your returns while minimizing your risks.

Here’s how economic indicators affect the performance of indices:

Gross domestic product (GDP)

Gross Domestic Product (GDP) is a widely used indicator for measuring the overall economic output of a country. It considers the total value of goods and services produced by domestic and foreign entities within a country’s borders.

When the GDP growth rate increases, it suggests that the economy is expanding, leading to improved corporate earnings. This GDP growth, in turn, can positively impact stock prices and the overall performance of indices.

Conversely, a low growth rate of GDP may give you a signal that companies may not contribute well to a country due to low corporate earnings and factors like employment rates or inflation.

You can use the information on the country’s GDP to assess if an index can potentially give you income returns in your target period.

Monetary policies

Monetary policies refer to the actions and strategies implemented by a country’s central bank (e.g., the Federal Reserve in the United States and the European Central Bank in the Eurozone) to manage the supply of money, credit, and interest rates to achieve specific economic objectives.

When central banks implement lowering interest rates, it becomes cheaper for businesses and individuals to borrow money. This stimulates economic activity and often leads to increased corporate earnings, which can boost the prices of indices.

On the other hand, a monetary policy that makes a more robust currency can create a nation’s exports less competitive and reduce the value of overseas earnings when converted into the home currency. This affects companies’ stock prices with international exposure, potentially exerting downward pressure on the index.

2. Industry Analysis

Industry analysis lets you interpret a particular group of companies and see their past trends, demand-supply mechanics, and future outlook, which is helpful when trading indices in contract-for-difference (CFD) platforms.

Each sector has unique characteristics, drivers, and vulnerabilities. It creates a pattern you can analyse and consider whenever you want to trade an index.

To give an instance, let’s consider the technology sector. You have discovered that the tech industry has a historical pattern of increased demand during the months of the holiday season due to higher consumer spending on electronics and gadgets.

With this insight, you can trade CFD indices in tech industries that manufacture specific products in high demand during the holiday season, as you have expected that there will be a surge in stock prices.

Industry analysis lets you identify the patterns that these industries are experiencing so that you can take advantage of when to trade indices.

3. Company analysis

Company analysis is a more specialized form of evaluation compared to industry analysis. This approach typically relies on a company’s financial statements to evaluate its financial health and performance.

You can use the three types of financial statements, income statements, balance sheets, and cash flow statements, to evaluate whether specific indices are suitable for long-term or short-term trading strategies.

How financial statements can be useful when trading indices

Let’s break down how it can help you trade indices into four key aspects.

First, an assessment of income statements can give you insights into the revenue and earnings of the companies that make up the index. This can help you identify which stock indices have robust revenue and earnings growth.

Second, higher debt levels on a company’s balance sheet are more vulnerable to economic downturns. This can affect an index, resulting in low trading activity. This means an index is hard to trade and may give you a low-income return.

Lastly, traders focused on achieving their desired capital return can refer to the income statement for dividend information. A stable or increasing dividend history enhances the index’s attractiveness for traders seeking reliable income streams.

4 easy Steps to Trade in CFD Indices

Trading in CFD indices can be an attractive way to speculate on the price movements of indices. This method allows traders to take advantage of price fluctuations in the markets and potentially profit from both rising and falling prices. It can be an appealing option for those who are seeking a more comprehensive range of investment opportunities or who prefer to trade without the need to acquire physical assets.

Here’s an easy guide on how to trade in CFD indices:

1. Create a trading account

You must choose and complete an account with your preferred broker.

A premier CFD trading platform, markets.com, provides access to an extensive array of CFD assets. This trading platform is regulated by competent authorities, guaranteeing the safety and security of your personal information and hard-earned capital.

2. Perform a fundamental analysis

Based on what you have learned in this article, conduct a fundamental analysis compromising economic, industry, and company analysis.

This approach will make you more confident in the selected indices as they undergo thorough research and analysis, significantly enhancing your chances of success in the financial markets.

3. Set your trading strategy

You need to develop an indices trading strategy to guide your way in indices trading. This may include setting your preferred entry and exit points, stop-loss orders, and take-profit orders.

At markets.com, you can use the free insight-driven tools to give you all the market intelligence and analysis you need to become a more confident, decisive trader.

4. Place your trade

On the broker’s trading platform, select the CFD index you wish to trade and choose whether you want to go long (buy) or short (sell). You can now enter the trade size and any desired stop-loss and take-profit levels.

Streamline your indices trading experience with ease on markets.com

Fundamental analysis is a valuable instrument in the trader's toolkit for assessing whether an index is either overvalued or undervalued by the market.

However, note that using fundamental analysis is entirely at your discretion, given that another equally valid approach known as technical analysis has its own advantage.

Regardless of the method, your goal must ensure that the index you analyze aligns with your value criteria and provides actionable insights.

Perform a fundamental analysis in the best CFD trading platform, markets.com. We have a list of popular indices such as Dow Jones, FTSE 100, and much more.

Ready to trade with markets.com? Creating an account is easy.

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When considering "CFDs" for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.