What are futures stock indices?

Definition and Examples

Stock index futures are legal agreements to buy or sell a stock market index at a specified future date and price.

How Stock Index Futures Work

Stock index futures are considered derivatives, meaning the actual stocks are not exchanged. Instead, the buyer and seller enter into a contract with each other, with the terms of the contract specified for each contract. Stocks are typically bought in quantities, which can be costly, but stocks are not purchased in these contracts.

What This Means for Individual Investors

You can take short or long positions on hundreds of stocks with a smaller amount of money compared to the cost of each individual share, and in less time. Although stock index futures can be leveraged, you trade more efficiently because you use less money for trading. However, it can be easy to drift and overtrade, as the futures market is open nearly 24 hours a day, six days a week, and you may find yourself constantly watching the market instead of following your strategy.

Advantages and Disadvantages of Stock Index Futures

Advantages: The ability to speculate on future prices without needing to own the stocks in the index. You can achieve significant profits with little capital.

Disadvantages: Leverage can lead to a complete loss of investment if the trade goes in the wrong direction. It requires having cash in the margin account to meet potential margin calls.

Are Stock Index Futures Worth It?

Trading stock index futures can be costly when considering fees and margin calculations. There may be high margin requirements, depending on the broker you use. Stock index futures give you the ability to trade full indices of stocks at a significantly lower cost, so if you enjoy trading and can tolerate the potential risks of loss, it could be a successful avenue for investment.

If you wish to invest in stock index futures, it is advisable to consult an investment advisor or another experienced financial professional before making any trades. You will benefit from objective investment advice that may help you make more informed and responsible investment decisions.

Source: https://www.thebalancemoney.com/stock-index-futures-and-how-you-buy-them-4156839