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Understanding US Stock Market Index Futures: A Beginner’s Guide
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Last edited by
Ulfath Joad
Ulfath Joadon
July 21, 2023
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Created on
May 19, 2023
US stock market index futures allow investors to trade the underlying index at a predetermined price in the future. Index futures can help investors hedge their portfolio, help in diversification, and speculate on market movements.
But what exactly are the US Stock market index futures? And how do they work? If you’re interested in the ins and outs of index futures and how you can learn to trade them, continue reading.
What are US Stock Market Index Futures?
US stock market index futures, just like every other future contract, is an agreement to buy or sell the underlying index at a pre-specified future date. The underlying index could be any of the US indices such as the following:
- New York Stock Exchange
- Standard & Poor (S&P) 500
- Dow Jones
- Nasdaq 100
US stock futures market hours are different from the regular market hours. Investors can trade index futures 24 hours a day, 6 days a week. One can trade US stock market futures real time by placing a trade order if they have a trading account.
How do Index Futures Work?
Index futures allow traders to buy or sell a contract. The contract is then settled at a future date which is pre-specified in the contract. The index futures are like a zero-sum game — one party wins, the other loses, and no net wealth is transferred between the two.
The price of the index futures depends on the expected dividends and the interest rates and usually differs from the value of the actual index. It means that the price depends on the cost of holding the underlying index until the contract expires and its expected income.
How can Beginners Learn to Trade US Stock Market Index Futures?
If you’re a beginner who wants to learn how to trade the US stock market index futures, check out Fi Money. It's a money management app that allows investors to invest in the top US companies at zero brokerage fees and industry-best forex rates.
We recommend the app because it can help you learn about the US stock market futures with explainers and curated collections of popular stocks and indices. It is a convenient way to foray into the US markets.
Besides Fi, multiple resources are available to investors wanting to learn to trade the US stock market futures today. You can begin with taking online courses to learn better or keep a track of the market performance by perusing newsletters such as the Daily Market Report.
Conclusion
US stock market index futures are a type of derivative contract with a financial index as the underlying asset. It can help you reduce risk, leverage capital, and access a wide range of markets.
To trade the US stock market index futures, you need to have a solid understanding of the underlying index, the trading platform, contract specifications, and market dynamics. You also need to have clear financial goals, market trading strategies, risk management plans, and a clear mindset.
Frequently Asked Questions
1. What are the benefits of trading US stock market index futures?
Some common benefits of trading US stock market futures are as follows:
- Gain significant market exposure as compared to individual stocks with only a little capital..
- Future markets are liquid, which ensures you can execute your orders quickly at fair prices.
- You can have easy access to a range of assets very easily, helping you diversify your portfolio with ease.
2. How do index futures differ from trading individual stocks?
Unlike individual stocks, index futures come with fixed terms such as size, tick, and expiration date, that impact your trading outcomes.
Moreover, future markets — with or without index — are open almost all the time, giving you more trading opportunities.
3. What are some common risks associated with trading US stock market index futures, and how can they be mitigated?
Some common risks and strategies to mitigate those risks are as follows:
- High market volatility exposes you to high risks at all times.
- Any change in interest rates can cause the fair value to deviate creating losses for traders.
- If the counterparty fails to honour the terms of contracts, it can result in delay or losses for traders.
Traders can mitigate their risks by hedging (taking opposite positions related to a security to offset the risk of an existing position), diversifying their portfolio, and having a strict set of risk management rules in place. For example, using stop-loss orders, position sizing, and trailing stops, among others.
Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
