The Definition of Stock Market Futures

Stock futures track the value of stock market indexes.

Futures contracts are derivative financial products that trade against the value of an underlying product. Traditional futures trade on commodities like grains, coffee and oil. In recent years, the futures market has expanded to include futures trading on financial instruments like bonds and the stock market. Stock market futures have several uses for investors and traders.

Identification

Futures contracts are contracts for the future delivery of a specific commodity or financial instrument. The contracts trade on specific futures and commodities markets. There are futures contracts that trade against the value of specific stock market indexes. Those futures contracts are known as stock market futures. The contract prices will be at or very close to the specific stock market index.

Types

Futures contracts trade on over 35 different U.S. and international stock indexes. Market followers pay the most attention to the futures prices of the Dow Jones Industrial Average, S&P 500 and Nasdaq 100. Traders and institutional investors use other futures contracts for specific trading strategies or to hedge large stock portfolios. Also available are the e-mini futures contracts that are popular with individual traders. Standard futures contracts have single contract margin deposit requirements of $20,000 to $25,000, while the e-mini contracts will be one-third to one-fifth the size of the standard contract, with proportionally smaller margin deposits.

Significance

Futures trading takes place almost 24 hours per day. In comparison, the stock market is only open 6.5 hours per day. The extended hours of futures trading provide stock market investors with an indication of how the stock market indexes will perform when they open each day. The extra trading hours available in the futures market allow traders to react to financial news events when the stock market is closed. The stock futures market also provides a very liquid trading environment for traders who want to profit from smaller moves in stock index values.

Considerations

Stock market investors can use the stock market futures prices to provide an indication during closed hours of what will happen when the market opens. The television financial networks will show the futures prices for the major indexes before the market opens, then switch to the actual index values during market hours.

Potential

Stock market futures are popular with short-term traders for several reasons. Futures trading allows a high amount of leverage on the price changes in the market. The futures market is active with low trading costs. The 24-hour nature of the futures market allows trading during non-traditional hours. This can be convenient for traders in other countries or those that have day jobs and want to trade at night.

References

• CME Group: Equity index futures
• Investopedia: Index Futures