Index Futures (2024)

FAQs

What is the index futures? ›

Overview. Equity Index futures are “futures contracts” on equity indices. They are cash settled contracts and the majority have quarterly expiration dates scheduled for the months of March, June, September, and December.

Index futures are contracts to buy or sell a financial index at a set price today and are settled in the future. These contracts were initially meant only for institutional investors but have been open for decades to anyone. Portfolio managers use index futures to hedge their equity positions against a loss in stocks.

How Do Index Futures Work? When trading in index futures, traders commit to buying or selling the underlying index at a predetermined price on a specified future date. To participate, traders must deposit an initial margin, a fraction of the contract's value.

The rise or fall in index futures outside of normal market hours is often used as an indication of whether the stock market will open higher or lower the next day. When index futures prices deviate too far from fair value, arbitrageurs deploy buy and sell programs in the stock market to profit from the difference.

Stock index futures hold significant importance in trading due to their effectiveness when cash for large stock purchases is limited. These derivative-based investments allow traders to invest less capital while potentially earning more.

Cons of Index Futures

Index futures investors may need to deposit additional funds before contract expiration to meet maintenance margin requirements. Trading on margin amplifies risk; a wrong bet can lead to losses that far surpass losses from typical stock investments.

Market Risk: The most obvious risk with futures trading is that prices can be highly volatile, and changes are can be swift, adverse, and devastating. 11 This is because the market risk is magnified by leverage, when there's already enough to worry about when supply and demand shift.

When trading futures vs. stocks, there are no rules requiring a minimum account balance or restricting how many trades can be placed in a week. As a futures trader, you can trade long or short multiple times a day or week without worrying about day trading restrictions.

Stocks often pay dividends to shareholders, assuming the company is profitable and chooses to distribute some of those profits to its shareholders. Futures contracts do not pay dividends. The profit or loss from a futures position comes from the change in the underlying asset's price.

Futures contracts have a limited lifespan that will influence the outcome of your trades and exit strategy. The two most important expiration terms are expiration and rollover.

Are index futures cash settled? ›

Index futures are purely cash-settled since it is not possible to physically deliver an index, and the settlements happen daily, on a mark-to-market basis. Index futures are traded through futures brokers on stock exchanges, and a futures contract can be made through a buy or sell order.

What are Index Futures? Index futures are contracts that allow a trader to purchase or sell a financial index today and have it resolved at a later date. Traders speculate on the price direction of an index, such as the S&P 500, using index futures.

The S&P 500 index tracks the 500 largest U.S. publicly traded companies by market value and is a common benchmark used for the broader U.S. equity markets. Futures are financial contracts that obligate the trader to buy or sell an asset at a predetermined price by a set date.

Compare futures with ETFs and see why futures are the more compelling instrument. None, there are no annual management fees. ETFs have annual management fees. Futures margin is capital-efficient with performance bond margins usually less than 5% of notional amount.

S&P 500 futures are a type of derivative contract that provides buyers with an investment price based on the expectation of the S&P 500 Index's future value. Investors and the financial media follow them closely because they act as an indicator of market movements.