Trading on indices enables traders to speculate on whether an index will rise or fall, without actually buying shares in the underlying assets. In this sense, one can trade an index just as one would trade a stock, currency or commodity.

As with individual equities, in order to make a profit, a trader can decide to ‘sell’ an index at a higher price than its initial ‘buy ’cost, or to ‘buy’ an index back at a lower price than one he/she originally ‘sold’ it for.

Each share in an index contributes towards the calculation of its overall value, with the index rising or falling in value depending on the performance of its collective stocks. So, if the FTSE 100 index is ‘up’, more investors are buying than selling, and share prices have increased.

However, if more shares are being sold than bought, the index will instead decline.