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Stock Index Futures: What You Need to Know

, | April 9, 2018 | By

The trading of traditional futures contracts, from grains to gold, was essentially developed as a way of managing risk. Along the way, investors gained a window into what those underlying commodities were worth on any given day, which brought more funds and liquidity into a marketplace.

And that is still very much the case when it comes to investing in financial and stock index futures, even though they are the relative newcomers on the block.

Stock index futures allow investors to acquire contracts whose underlying value is based on an extensive variety of popular equity indexes, as opposed to buying the stocks themselves. Demand for these investment vehicles has soared in recent years, along with innovations in the sector.

While these products allow investors to hedge their investments in equities, the contracts also give market players a sense of where the broader stock market is heading, because they are largely traded around the clock, six-days a week.

Thirty-Five Years Young

This first successful equities futures product was the S&P 500 Futures contract, which marked its 35th anniversary in 2017. Today, it’s considered the most liquid futures product in the world. The inception and popularity of the “Spoo” — as it is sometimes called — led to the launch of related products in the U.S. and around the world.

The CME introduced the E-mini S&P in 1997 with the aim of attracting players with smaller budgets. Trading in the E-mini contracts soared from 885,819 in its first year to just under 500 million contracts by 2016.

Any trades are educational examples only. They do not include commissions and fees.

S&P Futures prices are often quoted before trading begins in the U.S. because it gives investors insight into the direction of trading for the day, if the not the broader economy.

A buyer of an index futures contract agrees to buy an index at a fixed price set at a specific date in the future. If the index price rises the buyer makes a profit, and if it falls the seller of the contract reaps the reward. .

In a major innovation, stock index futures are settled in cash. The majority have quarterly expiration dates: March, June, September and December.

Futures Index Products

Here are the main stock index futures markets to keep in mind. Some of these investments have an E-mini option, which is the electronic traded version of the contract. These vehicles are considered more accessible to the smaller trader.

  • DJIA Futures: Allows investors to hedge or speculate on the Dow Jones Industrial Average index of blue chip stocks. The E-mini Dow is an electronic futures contract representing a portion of the standard DJIA futures.
  • The NASDAQ-100 Futures: Tracks ones of the leading exchanges in the U.S. The E-mini Nasdaq 100 is the most active by volume in this grouping.
  • Russell 2000 Futures: The Russell 2000 index, along with the E-mini Russell 2000, is the benchmark for gaining exposure to small-cap company shares.
  • S&P 500 Index Futures: Focuses on 500 large U.S. stocks and is seen as a yardstick for investors needing insight into the direction of global equities and the broader economy.

Index futures are also available globally, including DAX and SMI index futures in Europe and Hang Seng Index futures in Asia.

Seeking Expert Advice

Investors should seek financial advice before considering an investment in stock index futures because, like all investments, these vehicles offer both risks and rewards. Contact us to get step-by-step advice from a qualified futures broker on how to invest in any type of futures.

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