What Are Stock Index Futures? (2024)

FAQs

What Are Stock Index Futures? ›

Stock index futures, also referred to as equity index futures or just index futures, are futures contracts based on a stock index. Futures contracts are an agreement to buy or sell the value of the underlying asset at a specific price on a specific date. In this case, the underlying asset is tied to a stock index.

Index futures, which are also called stock or equity market index futures, work just like other futures contracts. They give investors the power and obligation to deliver the contract's cash value based on an underlying index on a specified date at an agreed-upon price.

A stock index futures contract binds two parties to an agreed value for the underlying index at a specified future date. For example, the March futures on the Standard & Poor's 500 Index reflects the expected value of that index at the close of business on the third Friday in March.

E-mini S&P 500 futures (/ES) are the most actively traded U.S. equity index futures contract, with 1.81 million contracts changing hands on average each day during 2023, according to the CME Group's exchange data.

Stock Future contract is an agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller. The contracts have standardized specifications like market lot, expiry day, unit of price quotation, tick size and method of settlement.

Examples of stock indexes include the Dow Jones Industrial Average (DJIA), the Nikkei Stock Average, the S&P 500, the Nasdaq Composite, and the Wilshire 5000.

Futures contracts on the value of a particular stock market index are known as stock futures. Futures Price = Stock Price × (1 + Risk-Free Interest Rate – Dividend Yield). Futures are inherently priced based on their spot value; similarly, stocks follow a similar pattern when being priced.

Futures are derivative contracts to buy or sell an asset at a future date at an agreed-upon price. That asset might be soybeans, coffee, oil, individual stocks, exchange-traded funds, cryptocurrencies or a range of others.

What are stock futures doing right now? ›

What futures are most profitable? Trading in futures markets such as the Micro E-Mini Russell 2000 (M2K), Micro E-Mini S&P 500 (MES), Micro E-Mini Dow (MYM), and Micro E-Micro FX contracts can be highly profitable due to their distinct market characteristics.

The S&P 500 and Dow Jones Industrial Average are the top large-cap indexes. Notable mid-cap indexes include the S&P Mid-Cap 400, the Russell Midcap, and the Wilshire US Mid-Cap Index. In small-caps, the Russell 2000 is an index of the 2,000 smallest stocks from the Russell 3000.

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.

Let us assume that you have purchased a futures contract for 100 shares of XYZ company at a value of Rs. 50 per share at a certain date. When the contract expires, you will receive those shares bought at Rs. 50, the same price at which you agreed to buy them, irrespective of the present price prevailing.

That said, generally speaking, futures trading is often considered riskier than stock trading because of the high leverage and volatility involved that can expose traders to significant price moves.

Speculating with futures

Futures can be used to speculate on the market to attempt to profit from price swings in commodities, stock indices, and financial instruments. Speculators are the primary participants in the futures market, willingly taking risks that hedgers wish to transfer.

How to Trade Index Futures? In index futures investing or trading, the buyer and seller lock purchase and sell bids. Both parties agree to close their holdings lawfully at a specific price and on a specific date. Traders' buy and sell orders are placed by a futures broker on their behalf.

Futures are more cost-effective than ETFs since they have fewer transaction costs, holding costs, and margins than ETFs.

S&P 500 Futures are financial futures which allow an investor to hedge with or speculate on the future value of various components of the S&P 500 Index market index.