Index Futures

What are 'Index Futures'

Index futures are a futures contracts on a stock or financial index. For each index there may be a different multiple for determining the price of the futures contract.

BREAKING DOWN 'Index Futures'

For example, the S&P 500 Index is one of the most widely traded index futures contracts in the U.S. Stock portfolio managers who want to hedge risk over a certain period of time often use S&P 500 futures to do so. By shorting these contracts, stock portfolio managers can protect themselves from the downside price risk of the broader market. However, by using this hedging strategy, if perfectly done, the manager's portfolio will not participate in any gains on the index; instead, the portfolio will lock in gains equivalent to the risk-free rate of interest.

Alternatively, stock portfolio managers can use index futures to increase their exposure to movements in a particular index, essentially leveraging their portfolios.

RELATED TERMS
  1. Managed Futures Account

    An account that is like a mutual fund, except that positions ...
  2. Index Arbitrage

    An investment strategy that attempts to profit from the differences ...
  3. Futures

    A financial contract obligating the buyer to purchase an asset ...
  4. Managed Futures

    An alternative investment strategy in which professional portfolio ...
  5. Futures Contract

    A contractual agreement, generally made on the trading floor ...
  6. Limit Move

    The largest amount of change that the price of a commodity futures ...
Related Articles
  1. Markets

    Using Index Futures To Predict The Future

    Want to know whether the stock market will open up or down? Check out the index futures.
  2. Trading

    Avoid Future Shock By Protecting Your Portfolio With Futures

    Worried about protecting your portfolio of diversified stocks and assets? Using futures with correct strategies can help.
  3. Trading

    Advantages Of Trading Futures Over Stocks (APPL)

    We look at the top eight advantages of trading futures over stocks.
  4. Investing

    Options on Futures

    Options on futures contracts offer another way for day traders to use options. These are traded on the same exchange as the underlying futures contract. Traders should take care to understand ...
  5. ETFs & Mutual Funds

    The Pros and Cons of Indexes

    Learn about the advantages and disadvantages of stock indexes and passive index funds. Discover how there is an opportunity cost to using index funds.
  6. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  7. Trading

    How to Trade Dow Jones Future Contracts

    Learn about the Dow Jones Index futures contracts available and obtain step-by-step instruction on how to trade the stock index futures.
  8. ETFs & Mutual Funds

    PHDG: PowerShares S&P 500 Downside Hedged ETF

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  9. Trading

    Futures, Derivatives and Liquidity: More or Less Risky?

    Futures and derivatives get a bad rap after the 2008 financial crisis, but these instruments are meant to mitigate market risk.
  10. ETFs & Mutual Funds

    3 Reasons to Use ETF Options Over Futures (SPY, QQQ)

    Learn about exchange-traded fund (ETF) options and index futures, and why it might be a better decision to use ETF options instead of futures.
RELATED FAQS
  1. What do the S&P, Dow and Nasdaq futures contracts represent?

    Every morning before North American stock exchanges begin trading, TV programs and websites providing financial information ... Read Answer >>
  2. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between ... Read Answer >>
  3. How do S&P 500 futures work?

    Learn about the mechanics of S&P 500 futures contracts, a type of stock index future introduced by the Chicago Mercantile ... Read Answer >>
  4. How do the investment risks differ between options and futures?

    Learn what differences exist between futures and options contracts and how each can be used to hedge against investment risk ... Read Answer >>
  5. What types of items can you buy futures for?

    Learn what items futures may be purchased for, what a futures contract is and discover how the futures markets have greatly ... Read Answer >>
  6. How is fair value calculated in the futures market?

    Learn how the fair value for futures stock index contracts is calculated, and understand how differences between those numbers ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center