The futures markets trade contracts that call for the future delivery of commodities and financial instruments. One class of futures -- equity futures -- have contract values based on selected stock market indexes.
Stock index futures offer an alternative way to trade the stock markets. Unique features of futures include a high level of leverage and around-the-clock trading. A futures contract lives up to its name and is for the future delivery of a specified amount of the underlying asset.
The futures of a specific asset -- such as a stock index -- will have a range of contract dates. Equity futures typically have a year's worth of quarterly contract dates plus several annual contract dates for traders who want to take a long-term position on a stock index. If an equity futures contract is held until its closing date, the final value of the futures contract will be cash settled based on the actual stock index value. There are also futures trading against selected small and mid-cap stock indexes.
The popular stock indexes have futures contracts of different sizes. The Dow Jones has futures of three different sizes trading against it. Stock index futures are traded through a commodity futures broker. A futures contract trade can be opened with either a buy or a sell order. Buy orders result in a long position, which profits from a rising stock index. Sell orders give a short position to profit from a declining index.
The opening value of a futures trade is the price of the futures contract when the trade is placed, and profit or loss is calculated from that value. When a futures trade is placed, the trader must put up a margin amount set by the futures exchange. The trader's profit or loss on the trade adds to or subtracts from this margin deposit.
The margin deposit required to trade a stock index futures contract is a fraction of the future value providing the leverage of futures trading. During the stock market day, the futures value closely matches the index value. Overnight the futures trades toward where traders believe the market will open the next morning. Tim Plaehn has been writing financial, investment and trading articles and blogs since His work has appeared online at Seeking Alpha, Marketwatch.
Plaehn has a bachelor's degree in mathematics from the U. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system.
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What Are Pre-Market Futures? Futures Contracts A futures contract lives up to its name and is for the future delivery of a specified amount of the underlying asset. Trading an Index Futures Contract Stock index futures are traded through a commodity futures broker.
Futures Considerations The margin deposit required to trade a stock index futures contract is a fraction of the future value providing the leverage of futures trading. References 3 CME Group: About the Author Tim Plaehn has been writing financial, investment and trading articles and blogs since Zacks Research is Reported On:More...