Indices futures
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Index Futures
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. Instead, they only required the buyer to maintain a fraction of the contract amount in their account, called the initial margin.
Prices of index futures can fluctuate significantly until the contract expires. Therefore, traders must have enough money in their account to cover a potential loss, which is called the maintenance margin. Maintenance margin sets the minimum amount of funds an account must have to satisfy any future claims. Also, as the value of the trade climbs before expiration the broker can demand additional funds be deposited to top-off the value of the account—known as a margin call.
An index futures contract states that the holder agrees to purchase an index at a particular price on a specified future date. Index futures typically settled quarterly, and there are several annual contracts as well. Equity index futures are cash settled meaning there's no delivery of the underlying asset at the end of the contract. If on expiry, the price of the index is higher than the agreed-upon price in the contract, the buyer has made a profit, and the seller— future writer —has suffered a loss.
Should the opposite be true, the buyer suffers a loss, and the seller makes a profit. For example, if the Dow were to close at 16, at the end of September, the holder who bought a September future contact one year earlier at 15, would have a profit. Profits are determined by the difference between the entry and exit prices of the contract. As with any speculative trade, there are risks that the market could move against the position.
As mentioned earlier, the trading account must keep funds or margin on hand and could have a margin call demand to offset any risk of further losses. Also, the investor or trader must understand that many factors can drive market index prices including macroeconomic conditions such as growth in the economy and corporate earnings or disappointments.
Portfolio managers will often buy equity index futures as a hedge against potential losses. If the manager has positions in a large number of stocks, index futures can help hedge the risk of declining stock prices by selling equity index futures. In the event of a market downturn, the stocks within the portfolio would fall in value, but the sold index futures contracts would gain in value offsetting the losses from the stocks.
For example, if in the above scenario, the portfolio manager shorts the index futures and the market rises, the index futures would decline in value. The losses from the hedge would offset gains in the portfolio as the stock market rises. Speculation is an advanced trading strategy that is not suited for many investors. However, experienced traders will use index futures to speculate on the direction of an index. Instead of buying individual stocks or assets, a trader can bet on the direction of a group of assets by buying or selling index futures.
By their nature, stock index futures operate differently than futures contracts for more tangible securities such as cotton, soybeans, or crude oil. Long position holders of these commodities future contracts will need to take physical delivery upon expiration if the position has not been closed out ahead of time. Businesses will frequently use commodity futures to lock in prices for the raw material they need for production. Financial Futures Trading.
Stock Trading. Stock Markets. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Introduction to Futures. Overview of Futures Products. How to Trade Futures. Futures Trading Considerations. What Are Index Futures? Key Takeaways Index futures are contracts to buy or sell a financial index at set price today, to be settled at a date in the future. Portfolio managers use index futures to hedge their equity positions against a loss in stocks.
Speculators can also use index futures to bet on the market's direction. International markets also have index futures listed. Pros Portfolio managers use index futures to hedge declines in similar holdings. Brokerage accounts required only a fraction of the contract's value held as a margin, Index futures allows for speculation on the index price movement.
Business use commodity futures to lock in commodity prices. Cons Unnecessary or wrong direction hedges will damage any portfolio gains. Brokers can demand additional funds to maintain the account's margin amount. Index futures speculation is a high-risk undertaking Unforeseen factors may cause the index to move opposite from the desired direction.
Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Terms Quadruple Witching Quadruple witching refers to a date that entails the simultaneous expiry of stock index futures, stock index options, stock options, and single stock futures.
Derivative A derivative is a securitized contract between two or more parties whose value is dependent upon or derived from one or more underlying assets. Its price is determined by fluctuations in that asset, which can be stocks, bonds, currencies, commodities, or market indexes. Futures Contract Definition A futures contract is a standardized agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
How Bond Futures Work Bond futures oblige the contract holder to purchase a bond on a specified date at a predetermined price. Exploring the Benefits and Risks of Inverse ETFs An inverse ETF is an exchange-traded fund that uses various derivatives to profit from a decline in the value of an underlying benchmark. Partner Links. Related Articles.
The latest commodity trading prices for Index Futures: Dow, S&P, Nasdaq and more on the U.S. commodities & futures market. Live Rates of Index Futures. Index Futures Live Chart, Intraday & Historical Chart. Index Futures Buy & Sell Signal and News & Videos, Index Futures Averages.
Alexander Kiel - UC Trading 24 minutes ago. The analysis considers tools such as the The Trend Trader helps to identify the current trend status of your favorite futures markets. It not only helps us to stay on the right side of market Michael Grech - Quantopolis.
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.
All market data contained within the CME Group website should be considered as a reference only and should not be used as validation against, nor as a complement to, real-time market data feeds. Commitment of Traders. Equity TCA Tool.
Pre-Market Trading
In finance , a stock market index future is a cash-settled futures contract on the value of a particular stock market index. The turnover for the global market in exchange-traded equity index futures is notionally valued, for , by the Bank for International Settlements at USD trillion. Stock index futures are used for hedging , trading , and investments. Index futures are also used as leading indicators to determine market sentiment. Trading using stock index futures could involve, for instance, volatility trading The greater the volatility, the greater the likelihood of profit taking — usually taking relatively small but regular profits. Investing via the use of stock index futures could involve exposure to a market or sector without having to actually purchase shares directly.
Using futures as an indicator
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.
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The influence of each stock on the index's performance is directly proportional to its relative market value. Constituent stocks with higher market capitalisation will have greater impact on the index's performance than those with lower market capitalisation. The popularity of Hang Seng Index futures and options has developed gradually with increasing domestic and international investors' participation. As both local and international investors regard Hang Seng Index as a time-tested benchmark for the Hong Kong equity market and yardstick of portfolio performance, these contracts are consistently used by different investors for trading and risk management purposes.
