Volatility indices Synthetic Indices

Synthetic Indices

Synthetic indices are financial instruments that derive their value from the performance of a basket of underlying assets, such as stocks, commodities, or currencies. Unlike traditional indices that track the actual prices of these assets, synthetic indices are created synthetically through complex financial engineering and derivative instruments.

How Do Synthetic Indices Work?

The creation of synthetic indices involves the use of derivatives, such as futures, options, and swaps. Financial institutions design these instruments to mimic the behavior of traditional market indices without directly holding the underlying assets. This allows investors to gain exposure to a diverse range of markets without the need to buy individual stocks or commodities.

The process typically involves establishing a contract between two parties – one seeking exposure to the index and the other willing to provide it. The provider, often a financial institution, crafts a synthetic index by combining various derivative instruments in a way that replicates the performance of the targeted market. This approach offers flexibility and efficiency, as it enables investors to access markets without the constraints associated with physically holding assets.

Advantages of Synthetic Indices:

  1. Diversification: Synthetic indices provide investors with a convenient way to diversify their portfolios across different asset classes and markets without the need for direct ownership of underlying assets.
  2. Liquidity: Derivative markets are often more liquid than the underlying markets, providing investors with enhanced liquidity and the ability to execute trades with ease.
  3. Cost Efficiency: Synthetic indices can be a cost-effective alternative to traditional investment approaches, as they eliminate some of the expenses associated with buying and holding physical assets.
  4. Flexibility: Investors can gain exposure to specific sectors, regions, or themes through synthetic indices, tailoring their investment strategies to meet specific preferences and risk profiles.

Challenges and Risks:

  1. Complexity: The creation and management of synthetic indices involve complex financial instruments, which may pose challenges for investors unfamiliar with derivative markets.
  2. Counterparty Risk: Investors face counterparty risk, as the performance of synthetic indices relies on the financial health and stability of the institutions providing the exposure.
  3. Leverage: The use of derivatives in synthetic indices can introduce leverage, amplifying both potential gains and losses. This increases the risk for investors who may not fully understand or manage leverage properly.
  4. Regulatory Scrutiny: Given the intricate nature of synthetic indices, regulatory bodies may closely monitor their development and use to ensure market integrity and investor protection.

How to create synthetic indices account with Brokers

Creating a synthetic indices trading account with brokers typically involves a series of steps. Keep in mind that the specific process may vary depending on the broker you choose, so it’s important to follow the instructions provided by the broker of your choice. Here is a general guide on how to create a synthetic indices account:

Research and Choose a Broker:

Start by researching brokers that offer synthetic indices trading. Look for reputable brokers with a track record of reliability, regulatory compliance, and a user-friendly trading platform.

Visit the Broker’s Website:

Once you have selected a broker, visit their official website. Most brokers have a “Sign Up” or “Open an Account” button prominently displayed on their homepage.


Click on the “Sign Up” or “Open an Account” button, and you will be directed to a registration page. Fill in the required information, which typically includes your name, email address, phone number, and a password.

Verification of Identity:

Brokers are required to comply with regulatory standards, which often involve verifying the identity of their clients. You may be asked to provide additional documents such as a government-issued ID, proof of address, or other forms of identification. Follow the instructions provided by the broker to complete the verification process.

Deposit Funds:

Once your account is verified, you’ll need to deposit funds into your trading account. Brokers usually support various deposit methods such as bank transfers, credit/debit cards, or electronic payment systems. Choose the method that suits you best and follow the instructions to make the deposit.

Navigate to Synthetic Indices Trading:

After funding your account, navigate to the trading platform or dashboard. Look for a section specifically dedicated to synthetic indices trading. Brokers often categorize different assets and instruments, so you should easily find the synthetic indices section.

Select Synthetic Indices and Customize Preferences:

Choose the specific synthetic indices you want to trade and customize your preferences, such as the trade size, leverage, and other relevant parameters. Be sure to review the available information about each synthetic index and understand the associated risks.

Practice with a Demo Account (Optional):

Some brokers offer demo accounts that allow you to practice trading with virtual funds. This is a great way to familiarize yourself with the trading platform and test your strategies without risking real money.

Start Trading:

Once you’ve configured your preferences and feel confident, you can start trading synthetic indices. Monitor your trades, stay informed about market conditions, and consider using risk management tools offered by the broker.

 FAQs about Synthetic Indices Trading

What are synthetic indices?

Synthetic indices are financial instruments created through derivatives and financial engineering to mimic the performance of traditional market indices without the need for direct ownership of underlying assets.

How do synthetic indices work?

Synthetic indices derive their value from a basket of underlying assets through the use of derivatives like futures, options, and swaps. They provide investors with exposure to various markets without physically holding the assets.

Why trade synthetic indices?

Synthetic indices offer advantages such as diversification, liquidity, cost efficiency, and flexibility. Investors can gain exposure to different asset classes and regions without the constraints of owning individual assets.

How can I create a synthetic indices trading account?

To create a synthetic indices trading account, follow these general steps:

  • Choose a reputable broker offering synthetic indices.
  • Visit the broker’s website and complete the registration process.
  • Verify your identity by providing necessary documents.
  • Deposit funds into your trading account using the supported methods.
  • Navigate to the synthetic indices trading section on the platform.
  • Customize your preferences and start trading.

What documents are required for account verification?

Brokers typically require a government-issued ID, proof of address, and additional documents to verify your identity. Check with your chosen broker for specific documentation requirements.

Can I practice trading synthetic indices before using real money?

Yes, many brokers offer demo accounts that allow you to practice trading synthetic indices with virtual funds. This is a valuable opportunity to familiarize yourself with the platform and test your strategies without risking real money.

What risks are associated with synthetic indices trading?

Risks include counterparty risk, leverage, and the complexity of derivative instruments. It’s crucial for investors to understand these risks and use risk management tools provided by the broker.

How can I deposit funds into my trading account?

Brokers typically support various deposit methods, including bank transfers, credit/debit cards, and electronic payment systems. Choose the method that suits you best and follow the broker’s instructions to make the deposit.

Are synthetic indices regulated?

The regulatory status of synthetic indices depends on the broker. It’s important to choose a broker regulated by a reputable financial authority to ensure compliance with industry standards and the safety of your funds.

Can I trade synthetic indices on mobile devices?

Yes, most brokers offer mobile trading apps that allow you to trade synthetic indices on smartphones or tablets. Download the broker’s app from the respective app store and log in to your account to access the trading platform.


Synthetic indices represent a fascinating evolution in the financial markets, offering investors new ways to access and navigate a diverse range of assets. While their advantages, such as diversification and cost efficiency, are noteworthy, it is crucial for investors to approach these instruments with a clear understanding of the associated complexities and risks. As the financial landscape continues to evolve, synthetic indices are likely to play a prominent role in shaping investment strategies and portfolio management strategies in the years to come.