A:

A futures contract represents a legally binding agreement between a party and counterparty to pay or receive the difference between the price when entering into the contract and the price when the contract expires. Contracts carry a multiplier that inflates the value of the contract, adding leverage to the position, and can be traded on the long side or short side without restrictions or uptick rules. An index futures contract mirrors the underlying cash index and acts as a precursor for price action on the stock exchange where the index is used. 

Index futures contracts trade continuously throughout the market week, except for a 30-minute settlement period in the late afternoon US central time, after stock markets close.  SP-500, Dow and Nasdaq index futures contracts trade on the CME Globex system, a 24-hour electronic marketplace, and are called "e-mini contracts". SP-500 also trades a larger-sized contract on CME's open outcry system but it attracts little volume compared to the electronic markets. Contracts are updated four times per year, with expiration taking place during the third month of each quarter.  

E-mini futures contracts trade from Sunday evening (US time) through Friday afternoon, offering traders nearly continuous market access during the business week. Liquidity tends to dry up between the US equity market close and opening of the European stock exchanges in the early morning hours (US time). Spreads and volatility can widen during these periods, adds significant transaction costs to new positions.

If the e-mini SP-500 futures contract is trading higher before the opening of US stock markets, it means the SP-500 cash index will trade higher following the opening bell.  Contracts track US index direction closely during regular stock market trading hours but will be priced higher or lower because they represent expected future prices rather than current prices.  Contracts denote approximate valuations for the next trading day when US markets are closed, based on perceptions about overnight events and economic data, as well as movements in correlated or inversely-correlated financial instruments that include the forex markets, which also trades nearly 24 hours per day.  

The contract multiplier calculates the value of each point of price movement. The e-mini Dow multiplier is 5, meaning each Dow point is worth $5 per contract. The e-mini Nasdaq multiplier is 20, worth $20 per point, while the e-mini SP-500 carries a 50 multiplier that's worth $50 per point.. For example, if an e-mini Dow futures contract is valued at $10,000 and a buyer picks up one contract, it will be worth $50,000.  If the Dow then falls 100 points, the buyer will lose $500 while a short seller will gain $500.

Index futures contracts are marked to market, meaning the change in value to the contract buyer is shown in the brokerage account at the end of each daily settlement until expiration. For example, if the e-mini Dow contract drops 100 points in a single trading day, $500 will be taken out of the contract buyer's account and placed into the short seller's account at settlement. 

RELATED FAQS
  1. Forward Contracts vs. Futures Contracts

    While both forward and futures contracts allow people to buy or sell a specific asset at a specific time at a given price, ... Read Answer >>
  2. How can I calculate the notional value of a futures contract?

    Learn how the notional value of a futures contract is calculated, and how futures are different from stock since they have ... Read Answer >>
  3. What does a futures contract cost?

    Learn about values of futures contracts and the initial margin a trader must place in an account to open a futures position, ... Read Answer >>
  4. How do I set a strike price for a future?

    Find out why futures contracts don't have set strike prices like options or other derivatives, even though price change limits ... Read Answer >>
Related Articles
  1. Trading

    Futures Fundamentals

    This tutorial explains what futures contracts are, how they work and why investors use them.
  2. Trading

    Beginner's Guide To Trading Futures

    An in-depth look into what futures are, and how you can build a solid base to begin trading them.
  3. Investing

    How You Could Have Made Money Between the Trump Win and Opening Bell

    There's money to be made on election night, even after the markets close. Here's how you could have done it last night.
RELATED TERMS
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset ...
  2. Contract Month

    The contract month is the month in which a futures contract expires.
  3. Back Months

    Back months are the available futures contracts for a particular ...
  4. Physical Delivery

    Physical delivery is a term in an options or futures contract ...
  5. Futures

    A financial contract obligating the buyer to purchase an asset ...
  6. Open Interest

    Open interest is the total number of options and/or futures contracts ...
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center