What Are Stock Index Futures?

A trader looks over a stock's performance.
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DEFINITION
Stock index futures are legal agreements to buy or sell stocks on a future date and at a specific price.

Stock index futures are legal agreements to buy or sell a contract derived from a stock index on a future date at a specific price.

Learn how stock index futures work, their pros and cons, and what they mean for you.

Definition and Examples of Stock Index Futures

Stock index futures are contracts between investors that essentially bet on a stock index's price changes—based on index points—on settlement day (the day agreed upon in the contract).

  • Alternate name: Equity index futures

For example, a Micro E-mini S&P 500 Futures (MES) contract is worth $5 per index point. Imagine that Joe sells one MES contract to Ann. On the contract date, the S&P 500 was trading at 4,100. On the settlement date, the S&P 500 traded at 4,101. The S&P 500 may have moved much more than one point in between the contract and settlement dates, but on the settlement date, Ann owes Joe $5.

How Stock Index Futures Work

Stock index futures are derivatives, so no actual stocks change hands. Instead, the buyer and seller enter a contract with each other, the terms of which are specific to the contract. Stocks are generally purchased in lots, which can become costly, but lots are not purchased in these contracts.

Index futures are traded on the Chicago Mercantile Exchange Globex and can be accessed through your broker if they offer index futures trading.

Instead, each investor pays a margin to a broker, which is the amount required to maintain the futures contracts. When the contract is entered, both parties agree to pay the difference of the index movement between the day the contract was entered and the settlement date.

Index futures based on the S&P 500, Nasdaq 100, Russell 2000, and Dow Jones Industrial Average are available in the U.S. The table below lists the specifications for each of the contracts.

 Index Ticker E-Mini Contract Size  Micro E-Mini Contract Size 
Nasdaq 100 MNQ $20 x Nasdaq 100 $2 x Nasdaq 100
S&P 500 MES $50 x S&P 500 $5 x S&P 500
Russell 2000  M2K   $50 x Russell 2000 $5 x Russell 2000 
Dow Jones MYM $5 x Dow Jones $.50 x Dow Jones

The Chicago Mercantile Exchange Group also has international index futures, as well as index futures for specific sectors such as utilities, healthcare, and communication services.

What It Means for Individual Investors

You can take short or long positions on hundreds of stocks for much less money than it would cost for each stock individually, and in much less time. While index futures are leveraged in that you use a smaller amount of capital to control a larger amount, you're trading more efficiently because you're using less money to trade.

It can be very easy to get carried away and trade too much because the futures market is open nearly 24 hours a day, six days a week—you might also find yourself chasing the market instead of following your strategy.

The risks involved in index futures are the same as with any futures trading—there is no way to know which direction the markets and indexes will turn when the contracts expire. You might not be able to close a position, and your stop and market orders might not execute if trading volume is low.

Pros and Cons of Stock Index Futures

Pros
  • Ability to speculate on future prices without having to own the stocks on the index covered by the futures.

  • Could potentially make a large amount of money with little capital.

Cons
  • Leverage can cause investors to lose their entire investment if the trade goes south.

  • Cash is required in margin accounts to fulfill potential margin calls.

Pros Explained

The chief advantages of futures come down to cost and speculation potential:

  • Speculation possibilities: You can speculate on future stock prices and give them more leverage. You have access to 24/7 securities trading in highly regulated markets and don't need to own the stocks on the index that the futures contract covers.
  • Costs to trade: When you're buying stock index futures contracts, you’re paying much less than the listed price for the stocks on the index tracked by the futures contract. For example, a $2,480 per-share investment for 100 shares of a fund that tracks the S&P 500 Index would cost $248,000. If you were to buy one S&P 500 futures contract (or 100 shares of the index), you'd pay quite a bit less.

Cons Explained

The disadvantages of trading in futures are all about high risk and the necessity of holding cash:

  • Leverage risks: One downside of index futures investing is the high risk of buying and selling these contracts. It's easy to wind up highly leveraged and lose your entire investment when market conditions go against you.
  • Cash and margins: There is one vital aspect to think about when you trade stock index futures. To take part in trades, you must keep cash in a margin account at a brokerage firm. If you don't maintain your margin account, your broker will call you to replenish it. This is known as a "margin call." If you don't have the money to keep your margin account full, you face a real danger of building up high debt levels quickly to finance the account. Many traders have lost their personal assets and gone very deep into debt in the past because of margin calls.

Are Stock Index Futures Worth It?

Index futures trading can still be costly when you account for fees and maintaining a margin account. Margins might be very high, depending on the broker you use. Stock index futures give you the ability to trade entire indexes worth of stocks for much less, so if you enjoy trading and have the risk tolerance to deal with the possibility of losses, it can be a successful way to invest,

If you're determined to invest in stock index futures, it's best to consult with an investment advisor or another experienced financial professional before making any deals. You’ll benefit from objective investment advice that may help steer you toward more measured and responsible investment decisions.

Key Takeaways

  • Stock index futures are legal agreements to buy or sell contracts on a future date at a specific price.
  • Stock index futures can allow investors to speculate on future prices, but they are also risky if prices change too quickly.
  • Stock index futures give you trading access to all stocks on an index at a much lower cost.
  • Stock index futures are available for the major U.S. indexes, some international indexes, and industry-specific indexes.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.

Article Sources

  1. Chicago Mercantile Exchange Group. "Equity Index Futures and Options."

  2. Chicago Mercantile Exchange Group. "CME Group All Products – Codes and Slate." Choose International Indices in Asset Class, and select All for other options.

  3. Chicago Mercantile Exchange Group. "Select Sector Index Futures."