Many people think that it is risky to trade stock index futures. Is this the case? Well, it can be, if you don’t educate yourself first, but if you can put some of your portfolio aside for this type of trading, the advantages really do far outweigh any disadvantages.
Futures trading is simply the buying (or selling) of an instrument which gains in value (or loses value) in the same way as the underlying index. Unlike buying the whole index, however, a future has a specified ‘maturity date’ when you are effectively closed out automatically.
Other advantages include:
- Leverage.
- Gaining exposure to an underlying index as a whole. This can be used to gear up a long term exposure (why put $1000 into a tracker fund each month, when you can simply buy a mini-sized Dow contract with $1000 margin, giving you a total value of $10,000?).
- Hedging your regular portfolio. Say you have $10,000 in your portfolio, but expect a big short term drop. You could sell all your shares and buy them back later, but you would have to pay charges, commissions and taxes. Instead you could simply sell a stock index futures contract to cover any losses you might make on your regular portfolio.
- You can bet on the market going up or down.
- You can generally trade share indices futures contracts around the clock, compared to shares.
Which share index futures can you trade?
You can trade most of the world’s major stock index futures by spread betting or regular futures contracts. Spread betting specifications for each index are fairly self-explanatory, as you can set the amount per point you wish to buy or sell.
With futures, there are specific contract sizes, determining how much money you can win or lose per point move in the index. For many stock indices, there are regular sized contracts and mini-sized or E-mini sized contracts. The mini contracts are much better to start with.
The most popular contracts are the Mini S&P 500, the mini-sized Dow (as well as it’s full sized counterpart ). It is also very common to trade stock index futures not based on any US indices – you can trade the French CAC 40, the German DAX, the ever popular FTSE 100, as well as asian indices such as the Japanese Nikkei 225, and the Hong Kong Hang Seng.
Online Futures Trading
Nowadays it’s possible to make a career out of trading stock index futures without ever even calling a broker. All you need to trade stock index futures online is a reliable internet connection, and a reliable broker. Check out these brokers, for review of some of the cheapest and most reliable spread betting firms and stock index futures brokers.
What affects the price of stock index futures?
As with all commodity futures, the price of stock index futures is determined by the supply and demand of the underlying commodity (as as these are futures, as well as the ‘cost of carry’ associated with holding the underlying commodity until the delivery date). In my opinion the most important factors to help you determine how price action will change is TECHNICAL ANALYSIS.
How can I get started trading stock index futures?
A great thing about trading stock index futures is that it is much easier to control your risk with them – they rarely have huge gaps like regular commodities do, so your stop losses are more likely to get triggered at the right price. They are a great place to start a trading career, but you must get educated.