The Basics of Stock Market Futures Trading

By Stock Research Pro • May 10th, 2011

Stock market futures, like all futures contracts, are financial products that are used to trade against the future price of the underlying asset. Traditionally, futures contracts have been used to trade on commodities like oil and grains but in recent years, the use of futures contracts with financial instruments like stocks and bonds serving as the underlying asset have has expanded.

What are Stock Index Futures?


Stock index futures are futures instruments that use a stock index (like the DJIA) as the underlying instrument. Since stock indexes are not directly traded, index futures serve as the principal means for trading stock indexes. The settlement of index futures usually involved the exchange of cash rather than actual delivery of the underlying stocks. So at expiration, the holder of a futures contract can calculate their profit or according to the settlement price as determined by the exchange.

  • Long position- If the price futures is less than the liquidation price, the buyer realizes a profit; if the converse is true, the buyer has a loss

  • Short position- If the futures price is greater than the liquidation price, the seller realizes a loss


    • How Traders Use Stock Market Futures


    Many short-term traders are active in stock market futures as they provide for a high degree of leverage as the market realizes price changes. The trading costs are relatively low and the market is active 24 hours a day, which adds an element of convenience. Some specific uses of stock futures can include:

  • Investing- Gaining access to a sector or market without making a direct purchase of shares

  • Trading- Seeking gains by exploiting market volatility

  • Hedging- Using stock index futures to hedge against losses in a stock portfolio

    • In addition, stock investors can monitor futures prices during the hours when the market is closed in order to have a sense what the market will do when it opens again.

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    The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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