How to trade stock index futures

Stock index futures are the crystal ball of the financial markets. They're bets on the direction of the equities market that track with key stock market indices. In the United States, stock futures date back to the s with commodities futures when regional farmers convened in Chicago to sell wheat to dealers. That scenario evolved to include trades for future bushels of wheat, livestock, or butter, among other items.

Member Sign In

View more search results. Find out more. A stock index represents the performance of a group of shares. With no physical assets to deal, most stock indices trading takes place via derivatives called futures.

Futures are contracts to trade a financial market on a fixed date in the future. A futures contract will always stipulate:. When a future expires, the two parties involved will settle the contract. Originally, futures were used by commodity producers to guarantee the price of their product ahead of sale.

But because they are a form of financial derivative — meaning that their price is derived from the price of the underlying market — they can be used to speculate on a variety of markets, including forex, interest rates and stock indices. When you buy an index future, you are agreeing to trade a specific stock index at a specific price on a specific date. If the index had fallen instead of rising, you would still have to buy at — and therefore make a loss.

When you open a futures position, your total exposure is much bigger than the capital you've put down to open your trade. To open the position, you'd only have to put down a fraction of that value, known as the 'performance bond.

Like any leveraged form of trading, though, this also makes futures risky. Find out how to manage your risk. You can use a futures contract to try to profit when an index falls in price going short , as well as when it rises in price going long. To short an index, you sell the futures contract instead of buying it. This means that you will sell the underlying index to the other party in the contract when the contract settles.

Futures markets tend to be very liquid , with lots of people buying and selling contracts at any given time.

This is especially true as a futures contract nears maturity. This makes futures useful for trading short-term trends. If you own multiple stocks that feature on a single index, and are worried about a downturn, you can offset the risk of losses with a short index future. If the index falls, your future will earn a profit, counteracting the loss from your stocks.

Because futures are leveraged, you can get exposure to an entire stock index without having to buy all the constituent shares individually, which would tie up a lot of capital. Futures are traded on exchanges, just like shares.

And like stock exchanges, futures exchanges have strict stipulations on who can interact directly with their order books. However, trading futures with a broker comes with a three big drawbacks that you should consider before you start. An index future will always stipulate the size of your position, which can make futures an inflexible way of trading indices. Instead, futures prices are calculated using the cost of carry of holding a position on the index, which takes dividends into account.

CFD trading allows you to deal on the changing prices of index futures without buying or selling the contracts themselves. This brings several benefits to traders:. However, because CFDs are a leveraged form of trading they do come with significant risk — including the risk that your losses can exceed deposits.

Trading an index CFD means entering into a contract to exchange the difference in price of an index from when you open your position to when you close it. Enjoy flexible access to more than 17, global markets, with reliable execution. Trade on the move with our natively designed, award-winning trading app. Create demo account. Futures exchanges tend to have much longer trading hours than stock exchanges, with some futures even traded around the clock. That can make them useful for predicting where a stock index will move — or at least where futures traders think an index will move — when its underlying exchange opens.

If some news breaks in the early morning that benefits the FTSE, traders might anticipate the upward move by buying FTSE futures, causing their price to rise. The price of FTSE futures then gives an indication of where the index will move when it opens. Ticks are the minimum price movement of a futures contract. So if the E-mini price moves from Forward contracts are financial instruments that have a defined date of expiry. In that respect, they function in a very similar way to futures.

However, there are some key differences between forwards and futures. Firstly, because futures are traded on exchanges, they are highly standardised. But forward contracts are traded over the counter OTC , and as such can be customised.

A future will always represent the same amount of the underlying asset, for example, whereas forward contracts can vary in size. Secondly, your profit or loss on an open futures position is realised on a daily basis, to incorporate any interim price changes. But profit or loss on a forward contract will only be realised when the contract ends.

But because you are trading with IG instead of on the exchange, your position is a forward contract. Compare features. The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how this product works, and whether you can afford to take the high risk of losing your money.

IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority and is registered in Bermuda under No. The information on this site is not directed at residents of the United States and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

Inbox Community Academy Help. Log in Create live account. Related search: Market Data. Market Data Type of market.

Established in Over , clients worldwide Over 17, markets. How to trade index futures Find out more Practise on a demo. What are futures? A futures contract will always stipulate: The market being traded The date of the trade The price at which the market has to be traded How much of the market has to be traded. What is an index future? Why trade stock index futures? The three biggest benefits of using futures to trade indices are:. Leverage When you open a futures position, your total exposure is much bigger than the capital you've put down to open your trade.

Going long or short You can use a futures contract to try to profit when an index falls in price going short , as well as when it rises in price going long. Liquidity Futures markets tend to be very liquid , with lots of people buying and selling contracts at any given time. How are index futures used? These benefits give index futures three main uses for traders:.

Hedging If you own multiple stocks that feature on a single index, and are worried about a downturn, you can offset the risk of losses with a short index future. Investment Because futures are leveraged, you can get exposure to an entire stock index without having to buy all the constituent shares individually, which would tie up a lot of capital. Ways to trade index futures Here are three ways you can start trading index futures. Using a broker Futures are traded on exchanges, just like shares.

Standardisation An index future will always stipulate the size of your position, which can make futures an inflexible way of trading indices. Index CFDs CFD trading allows you to deal on the changing prices of index futures without buying or selling the contracts themselves.

This brings several benefits to traders: Speculate on the cash prices of indices, using CFDs, as well as futures prices Trade major global indices online , alongside shares, forex, commodities, interest rates and more Choose your own position sizes, with much lower minimum sizes than with futures brokers Get access to margin rates from 0.

Index CFDs Trading an index CFD means entering into a contract to exchange the difference in price of an index from when you open your position to when you close it. Find out more about CFD trading.

Open an account now. Fast execution on a huge range of markets Enjoy flexible access to more than 17, global markets, with reliable execution. Deal seamlessly, wherever you are Trade on the move with our natively designed, award-winning trading app. Create demo account Create live account. What are the major stock index futures? How are futures used to predict market movements? What are ticks? What are forward contracts? You might be interested in Share trading Buy and sell thousands of international shares, including Apple and Facebook.

Commodities trading Enjoy the best commodity spreads on the market. Learn to trade News and trade ideas Trading strategy. About Charges and margins.

An index future is a type of futures contract that's used to trade stock indices. When you buy an index future, you are agreeing to trade a specific stock index at a. Both the New York Stock Exchange (NYSE) and Financial Industry Regulatory Authority, Inc. (FINRA) require a minimum of 25% of the total trade.

View more search results. Find out more. A stock index represents the performance of a group of shares. With no physical assets to deal, most stock indices trading takes place via derivatives called futures. Futures are contracts to trade a financial market on a fixed date in the future.

Important legal information about the email you will be sending. By using this service, you agree to input your real email address and only send it to people you know.

Why Zacks? Learn to Be a Better Investor.

Index Futures

The U. The best way to understand how stock futures work is to think about them in terms of something tangible. Let's say you own a popcorn company and you need to buy corn to make your product. Every business day, the price of corn goes up and down. You want to buy corn for the lowest price possible so you can make the most profit when you sell your finished product.

Stock Index Futures Overview

Due to their wide acceptance as benchmarks and deep liquidity, Equity Index and Select Sector futures can be used by risk managers and traders for a variety of purposes. These flexible products can be employed in numerous trading and hedging strategies. Another possible trading strategy is an index spread. A spread is the simultaneous purchase and sale of two futures contracts. An index spread is a common and effective trading strategy. The strategy is designed to express the relative value between index contracts rather than an outright market direction bias. Asset managers that want to use Equity Index futures to replicate exposure to an index may buy futures contracts and use the residual capital for cash management purposes or alpha producing tactical strategies. Because spread trades involve both a long and a short position in highly correlated contracts, they are generally viewed as less volatile and therefore less risky than an outright position in a single contract.

Derivatives and Hedge Funds pp Cite as.

By Investment U Research Team. Originally posted April 14,

Using futures as an indicator

Learning how to trade futures could be a profit center for traders and speculators, as well as a way to hedge your portfolio or minimize losses. But, for those who seek a fast-moving trading opportunity, futures trading may be right for you. A futures contract is quite literally how it sounds. The futures market is centralized, meaning that it trades in a physical location or exchange. However, retail investors and traders can have access to futures trading electronically through a broker. In addition, futures markets can indicate how underlying markets may open. For example, stock index futures will likely tell traders whether the stock market may open up or down. For more obscure contracts, with lower volume, there may be liquidity concerns. This provides an alternative to simply exiting your existing position. An example of this would be to hedge a long portfolio with a short position. The standard account can either be an individual or joint account. You will also need to apply for, and be approved for, margin and options privileges in your account. This feature-packed trading platform lets you monitor the futures markets, plan your strategy, and implement it in one convenient, easy-to-use, and integrated place. One of the unique features of thinkorswim is custom futures pairing. Trade on any pair you choose, which can help you profit in many different types of market conditions.

How Stock Futures Work

Index futures are futures contracts where a trader can buy or sell a financial index today to be settled at a future date. Investors and investment managers also use index futures to hedge their equity positions against losses. Index futures, like all future contracts, give the trader or investor the power and the commitment to deliver the cash value based on an underlying index at a specified future date. Unless the contract is unwound before the expiration through an offsetting trade, the trader is obligated to deliver the cash value on the expiry. An index tracks the price of an asset or group of assets. Index futures are derivatives meaning they are derived from an underlying asset—the index. Traders use these products to exchange various instruments including equities, commodities, and currencies. Some of the most popular index futures are based on equities. However, each product may use a different multiple for determining the price of the futures contract. Futures contracts don't require the trader or investor to put up the entire value of the contract when entering a trade.