What are Index Futures?

Index futures trading gives people an impression of a highly risky business. This misconception is mainly due to a lack of the required financial knowledge and a clear understanding of the objective of such financial instrument to hedge risk.

The popular stock indexes are E-mini SP 500, E-mini Nasdaq, mini-size Dow, DAX, Dow Jones Euro STOXX 50 and in Asia, the Nikkei 225, Hangseng, KOSPI, MSCI Taiwan and SiMSCI.

In simple words, trading index futures is the buying or selling(trading) of a certain number of contracts of a stock index to be settled (in cash) at a specified time in the future at a price determined at the time of purchase and sale.

Why do you want to trade index futures?

  • Participate in and trading the overall performance of stock markets
  • Sell first then buy later when market is bearish
  • High leverage - requires 10% or less of the actual contract value
  • Cash settlement - no need to deliver shares physically or electronically
  • Online trading platform available round the clock

Trading index futures can therefore be quite advantageous. You can actually trade the overall market movement rather than the movement of a single stock. If an investor therefore has good reasons to expect a country's stock market to rally but is not sure which is the best stock to buy, he can actually buy the underlying index futures which would allow him to participate in the overall market movement based on the movement of a basket of stocks represented in the index.

As futures trading were created for risk management, market users may either buy first or sell first and later liquidate their position with an opposite trade. This means that traders can actually "short sell" (sell first) in the futures exchange. Therefore, even in a bear market when most stock traders are losing money or sidelined, it is possible to profit if your market view is correct by selling index futures first and then liquidating later when prices have fallen. Of course, if you are wrong you are liable to make a loss.

You can leverage your capital with stock index futures. To trade one contract you would need to have the contract deposit or "margin" of up to about 10% or less of the contract value. Your return if the market moves in your favour would therefore be magnified by 10 times or more. However, if your market view is wrong, your losses would be also similarly magnified. Investors and traders should therefore be prepared with more than just the minimum margin deposit for one contract in order to weather volatile price fluctuations.

Getting Started with Stock Index Futures

The best way to get started is to get educated, go attend seminars offered by reputable broking houses and get involved - local trading communities and trading forums on the Internet. You can find yourself a mentor who specialised in the futures market that you intend to trade to guide you and shortcut your learning curve - saving time, money and avoid emotional stresses.