Stock Index Futures: What They Are and How To Trade

Stock index futures are an investment method you should know to diversify your strategies and increase your chances of profit. 

If you still need to learn more about it, we want to clarify your doubts about what they are and how to operate with stock index futures.

What are stock index futures?  

Stock index futures are a way of looking into an index’s future and predicting its price. 

These are legal agreements that are made between a seller and a buyer. In these contracts, an exchange of shares is established to take place at a specific price. 

As its name suggests, each future is tied to a stock index, which serves as the basis for the price. For example, it may be linked to the IBEX 35 or the NASDAQ 100. 

Due to their nature, these instruments are considered one of the best indicators of market confidence.

What are the advantages and disadvantages of futures

The main advantages of these instruments can be summarized in three points: the possibility of speculation, free time and low trading costs. 

On the one hand, the investor can speculate on the future price of the shares, generating leverage and being able to trade 24 hours a day, even though the markets are already closed. On the other hand, the cost is lower by investing in a single futures contract instead of choosing several stocks from an index. 

Regarding the drawbacks, we can summarize them in two keys: the high level of risk due to leverage and the need for cash and margin. 

First, these types of operations have a high level of risk due to leverage, which can produce large profits or resounding losses if market conditions do not accompany them. And second, to participate in this type of investment, it is necessary to have a large margin of cash in the account where the broker will operate to cover possible losses.

How to trade stock index futures?

There are two main ways to trade futures, and they are as follows: 

• Through a broker: buying and selling directly.
• Through a CFD: trading the contracts through the trading of contracts for difference.

Depending on what you expect to happen with the index, you can either go long or short. We will tell you more about it below.

Differences between short and long positions

Short positions allow you to sell the index at a fixed price, setting an expiration date. This is the best option when you think the index’s cost will fall between now and the expiration date. Thus, later you can buy at a lower price and benefit. 

Long positions allow you to buy the index at a fixed price with an expiration date. This is the best option when you think the index will increase. Thus, you can benefit from selling more expensive.

Practical example

Suppose you are trading a NASDAQ 100 Index Future today. This will be the index that will be considered the underlying asset. Considering the trading value of that index, a similar price is negotiated for the purchase in the future. 

The deal takes place today, and the expiration date is two months from now. If, during this period, the asset rises, you can close the contract by selling before two months. 

If, during the period, the asset falls, you can wait until the end of the two months or renew the contract until it rises.

So what do I need to know about stock index futures?

First, you must remember what they are: legal contracts to buy or sell assets in the future, with a price established from the present moment. 

You should also know that this type of financial instrument allows the investor to speculate on the future prices of the shares, being able to generate a very high profit but also with the possibility of losing a lot. 

Finally

it would be best if you considered that, especially at the beginning, it would be good for you to learn to operate with these instruments using a Stock Market Game, where you do not risk your money while you know.

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