Why large cap index investing makes sense
Have you been trying to decide where to park some of your money, with hopes that it will deliver solid, long-term or perhaps even short-term returns? Maybe, like many others, you have been investigating the pros and cons of stocks, index funds, exchange traded funds (ETFs), precious metals, cryptocurrency, real estate, and dozens of others. Of course, all those investments have their own list of pros and cons, but large cap indices (LCIs) can make a claim to having more pros than the others. There are a couple of reasons behind the logic of that assertion, and while index investing might not be everyone’s cup of tea, the practice certainly presents a long menu of opportunities for traders and investors of all types. Here’s a brief overview of what you should know about the subject before putting your hard-earned capital into one of the many big cap index funds out there.
Using CFDs Simplifies the Process
For investing professionals and amateurs who want the benefit of simplicity, any kind of index fund is a plus. That’s because, by their very nature, these multi-faceted vehicles allow you to hold ownership in dozens of companies at the same time, which helps reduce risk. The very idea of purchasing individual shares of each corporation’s stock is something that nearly everyone wants to avoid.
But what’s even more convenient than investing in a large group of stocks at the same time via a fund? Using CFDs to remove even more of the complexity. If you don’t know what are CFDs, then you should add the term to your investing vocabulary before moving forward. In short, a contract-for-difference, is a contract in which a seller and buyer agree to settle on a specific date, with the buyer paying the seller the change in price, or difference, between purchase and sale dates of the contract.
The beauty of CFDs is that they’re easy to buy and sell, they allow you to go long or short, and there’s no need to own or otherwise purchase the underlying securities. A CFD is an agreement between two willing parties, one of whom predicts that the price of an asset (in this case, a large-cap-index) will go up or down in value. The one who makes the correct prediction will earn the profit.
LCIs Combine the Best of Two Worlds
When you put your money into an LCI, you’re basically buying two very high-quality assets at the same time: an indexed group of securities and blue-chip stocks. Since indices offer the unique advantage of spreading out risk, even if one company in the group has a bad year, chances are that another will have a good year, thus offsetting the downward move in price of the one that took a hit. In mathematics, this principle is called the law of large numbers, and it shields investors from much of the risk inherent in the securities markets.
The second key advantage of LCIs is with the type of companies that make it up, which are all highly capitalized firms, most of which are older than average entities listed on the exchange. Think of the biggest, oldest corporations you know, and chances are that most or all of them are large caps. Combining the quality of big caps with the safety of index investing is a two-prong approach for safety and financial security.
Transparency Benefits Investors
One of the primary benefits of using CFDs or other methods of earning a profit on the large cap stocks is transparency. Unlike many smaller businesses, especially startups, the big caps nearly all have long histories of performance and offer extremely detailed financial records via annual and quarterly reports. If you want to know details about any of the members of an LCI, all you need to do is check out their respective financials, which are available online.
Pick your favorite large cap stock and examine its price history for the past year. Chances are, you’ll discover that there aren’t too many sharp rises or falls in value. That’s a commonality among the larger, older corporations, many of which are officially considered blue-chips. However, if you look at short-term price movement, it becomes obvious that swing traders, day traders, and anyone using CFDs has the potential to do well by playing the cyclical ups and downs of value. In all, large cap indices represent a worthwhile way for just about anyone to boost the value of a long-term portfolio or earn profits on short-term price changes.
No comments yet