All trading involves risk. Losses can exceed deposits.

How to trade index futures

Discover how stock index futures work – and how you can start trading them.

All trading involves risk. Losses can exceed deposits.

A stock index represents the performance of a group of shares. The FTSE 100, for example, shows how 100 of the biggest shares on the London Stock Exchange are performing.

With no physical assets to deal, most stock indices trading takes place via derivatives called futures. Here’s a rundown of what futures are, how they’re used to speculate on indices, and how you can start trading them.

What are futures?

Futures are contracts to trade a financial market on a fixed date in the future. A futures contract will always stipulate:

  • The market being traded
  • The date of the trade
  • The price at which the market has to be traded
  • How much of the market has to be traded

 

When a future expires, the two parties involved will settle the contract. They’ll do this either by physically delivering the market at the agreed price, or by settling in cash. When they settle in cash, they exchange the difference between the market’s current price and the price dictated in the contract.

Originally, futures were used by commodity producers to guarantee the price of their product ahead of sale. But because they are a form of financial derivative – meaning that their price is derived from the price of the underlying market – they can be used to speculate on a variety of markets, including forex, interest rates and stock indices.

What is an index future?

An index future is a type of futures contract that’s used to trade stock indices. When you buy an index future, you are agreeing to trade a specific stock index at a specific price on a specific date. Because there’s no physical underlying asset to deliver, index futures are always settled in cash.

Stock index future example

One popular index future is the E-mini S&P 500, which is based on the S&P 500. The S&P 500 is currently trading at 2595, and you use an E-mini S&P to buy the index at 2600 in two months’ time.

Two months down the line, imagine the S&P is now at 2610 – ten points above your contract’s settlement price. You settle the contract by buying the S&P 500 at 2600, and pocket the difference as profit.

If the index had fallen instead of rising, you would still have to buy at 2600 – and therefore make a loss.

Calculating profit or loss

To determine the size of your profit or loss, you need to take into account how many futures contracts you’d traded, and the value of each contract per point of movement in the index.

The E-mini S&P 500 contract is priced at $50 times its settlement price, which means that you make $50 for every point the index rises above 2600. 2610 – 2600 = 10 points, so you’ve made $500. If the S&P had settled at 5990, however, you would have lost $500 – even though the S&P has only moved down five points from when you opened the position.

Why trade stock index futures?

The three biggest benefits of using futures to trade indices are:

1. Leverage

When you open a futures position, your total exposure is much bigger than the capital you've put down to open your trade. Continuing with our example above, the full value of your E-mini contract would be $50 x 2600, or $130,000. To open the position, you'd only have to put down a fraction of that value, known as the 'performance bond.'

Like any leveraged form of trading, though, this also makes futures risky. Find out how to  manage your risk.

2. Going long or short

You can use a futures contract to try to profit when an index falls in price (going short), as well as when it rises in price (going long). To short an index, you sell the futures contract instead of buying it. This means that you will sell the underlying index to the other party in the contract when the contract settles.

3. Liquidity

Futures markets tend to be very liquid, with lots of people buying and selling contracts at any given time. In highly liquid markets, it’s often easier to place orders quickly and price movements tend to remain fairly stable. This is especially true as a futures contract nears maturity.

How are index futures used?

These benefits give index futures three main uses for traders:

Speculation

You don’t have to hold a futures contract all the way to expiry: instead, you can open an equal and opposite position in order to close the trade. This makes futures useful for trading short-term trends.

Hedging

If you own multiple stocks that feature on a single index, and are worried about a downturn, you can offset the risk of losses with a short index future. If the index falls, your future will earn a profit, counteracting the loss from your stocks. 

Investment

Because futures are leveraged, you can get exposure to an entire stock index without having to buy all the constituent shares individually, which would tie up a lot of capital.

Ways to trade index futures

Here are two ways you can start trading index futures.

Using a broker

Futures are traded on exchanges, just like shares. And like stock exchanges, futures exchanges have strict stipulations on who can interact directly with their order books. So if you want to buy and sell futures contracts themselves, you’ll need a futures broker. However, trading futures with a broker comes with a three big drawbacks that you should consider before you start.

1. Standardisation

An index future will always stipulate the size of your position, which can make futures an inflexible way of trading indices. The E-mini S&P 500’s minimum contract of $50 times the settlement price is at the lower end of the scale – the standard S&P 500 equivalent is $250 times its settlement price.

2. Margin rates

The high value of futures contracts, combined with their typically high volatility, mean that you’ll probably need to put down a fairly substantial amount of capital as margin in order to open your position. You’ll need to maintain this margin to keep your position open, otherwise you’ll be on margin call.

3. No dividends

Unlike other forms of index investing such as ETFs, you won’t receive any income from dividends when trading with futures. Instead, futures prices are calculated using the cost of carry of holding a position on the index, which takes dividends into account.

Index CFDs and spread betting

Spread betting and CFD trading both allow you to deal on the changing prices of index futures without buying or selling the contracts themselves. And you don’t need a broker to get started, because you trade with a leverage provider instead. This brings several benefits to traders:

  • Speculate on the cash prices of indices, using daily-funded bets and cash CFDs, as well as futures prices
  • Trade major global indices online, alongside shares, forex, commodities, interest rates and more
  • Choose your own position sizes, with much lower minimum sizes than with futures brokers
  • Spread betting profits are completely free from tax and stamp duty, and CFD trading is free from stamp duty*
  • Get low margin rates, from 0.5% on the FTSE 100, US 500, Germany 30 and Wall Street
  • Buy and sell major indices 24 hours a day

However, because CFDs and spread betting are both leveraged forms of trading they do come with significant risk – including the risk that your losses can exceed deposits.

While they share many benefits, CFDs and spread bets work in different ways:

Index spread betting Index CFDs

Spread betting on indices involves betting a certain number of pounds per point on whether your chosen index is headed up or down. So if you bet £5 per point long on a FTSE 100 future, then you’d make £5 for every point it moves up in price – but lose £5 for every point it moves down in price. 

 

You can spread bet on the FTSE from £1 per point.

 

Find out more about spread betting.

Trading an index CFD means entering into a contract to exchange the difference in price of an index from when you open your position to when you close it. If, for instance, you bought a FTSE 100 future at 7000 and sold it at 7100, you’d pocket the difference as profit. If the FTSE had fallen, you’d have made a loss. 

 

Our FTSE 100 CFDs start at £2 per point.


Find out more about CFD trading.

 

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FAQs

What are the major stock index futures?

Index (IG market name)

Futures symbol

Exchange

Dow Jones (Wall Street)

YM

Chicago Board of Trade (CBOT)

S&P 500 (US 500)

ES

Chicago Mercantile Exchange (CME)

FTSE 100

Z

London International Financial Futures and Options Exchange (LIFFE)

DAX (Germany 30)

FDAX

Eurex

ASX 200 (Australia 200)

AP

Australian Securities Exchange (ASX)

How are futures used to predict market movements?

Futures exchanges tend to have much longer trading hours than stock exchanges, with some futures even traded around the clock. That can make them useful for predicting where a stock index will move – or at least where futures traders think an index will move – when its underlying exchange opens.

FTSE 100 futures, for example, can be bought and sold from 1am to 9pm (UK time), while the FTSE 100 itself is only calculated from 8am to 5pm. If some news breaks in the early morning that benefits the FTSE, traders might anticipate the upward move by buying FTSE futures, causing their price to rise. The price of FTSE futures then gives an indication of where the index will move when it opens.

What are ticks?

Ticks are the minimum price movement of a futures contract. For instance, the S&P E-mini’s tick is 0.25 index points, which equates to $12.50 of a $50 contract. So if the E-mini price moves from 1000.00 to 1000.25, a buy position would gain $12.50 and a sell position would lose $12.50.

What are forward contracts?

Forward contracts are financial instruments that have a defined date of expiry. In that respect, they function in a very similar way to futures. And like futures, forward contracts don’t have to be kept open all the way until expiry.

However, there are some key differences between forwards and futures. Firstly, because futures are traded on exchanges, they are highly standardised. But forward contracts are traded over the counter (OTC), and as such can be customised. A future will always represent the same amount of the underlying asset, for example, whereas forward contracts can vary in size.  

Secondly, your profit or loss on an open futures position is realised on a daily basis, to incorporate any interim price changes. But profit or loss on a forward contract will only be realised when the contract ends.

When you spread bet or trade CFDs on index futures, you’re speculating on the price movements of futures contracts. However, because you are trading OTC with a leveraged provider instead of directly on an exchange, you’re actually buying a forward contract.

For example, when you open a futures position on IG’s FTSE 100 market, you’re trading on the price of the equivalent FTSE 100 future. But because you are trading with IG instead of on the exchange, your position is a forward contract.  

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