Index Futures

By: EconomyWatch   Date: 23 November 2010

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Index futures are futures contracts that are traded, with a stock or financial index as the underlying asset. Trading in index futures takes places in most of the futures exchanges across the world. Index futures have various uses such as hedging, investing and trading. One of the world’s most widely traded index futures is the S&P 500 Index of the US.

How Are Index Futures Traded?

Trading in stock index futures is tantamount to betting on the value of the underlying index. This is done for a specifiedprice to be delivered at a specified future date. It is important to understand the behavior of stock market indices as it hassignificant implications for trading in stock index futures.

Understanding the stock indices reveals how stock index futures are traded. These indices are developed to reflect theaggregate measures of the stock market performance and for quantifying the movements of stock market prices. This can extend to the whole market or a section of the market. These indices are used as a standard to compare the performance of investments. The index also serves as a leading indicator of a country’s economic performance. They are also used as an underlying asset fortrading in the futures index.

Futures contracts are standardized contracts. They are traded in well organized futures markets, which are responsible for facilitating the trade. This is done by standardizing their quantity, quality, delivery date, delivery location and counterparty. The counterparty is also known as the clearing house. In addition to enabling the participants to buy and sell, these exchangesalso ensure the contracts’ enhanced liquidity.

Benefits of Index Futures

  • Index futures endow investors with an opportunity to invest in a stock market without purchasing the shares directly.


  • It provides the advantage of volatility trading, where the profit is proportional to the volatility in the market.

Risks of Index Futures

Index futures trading are based on indices that are highly unstable. So, the risks of the stock market directly affect the index futures trading. Trading in index futures is similar to betting, because of its highly unpredictable character. This increases the risk of losing money. So, investors and participants are advised to take realistic risks while pursuing profit making opportunities to invest in the stock market.


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