are index futures?
Futures contracts started as a way farmers could sell their crops in advance
of harvest to lock in a good price or to raise funds a few months before the
crop was ready for market. The index futures we trade are traded on the same
exchanges where agricultural commodity futures are still traded. The Chicago
Mercantile exchange defines index futures as "legally binding agreements
to buy or sell the cash value of the underlying Index at a specific future date."
That's a big help, right? Let me see if I can do any better with some bulleted
facts which should answer most questions:
- Index futures are a financial instrument called a "futures contract"
with a value based on whatever stock index they represent. Today there is
no paper contract, just a book keeping entry, but the term contract is still
- The cash value of an index futures contract is based on the underlying stock
index multiplied by a fixed number plus a premium which represents the income
that the same money would have earned if invested elsewhere.
- The value of the index futures contract fluctuates continuously throughout
the day as the underlying stock index changes. The values of the stock indexes
are recalculated every second.
- Index futures are traded on an exchange. Today this often means an electronic
exchange with no actual trading floor.
- The steps in a futures index transaction normally include transmitting an
order to a broker, from the broker to the exhange, matching each buy order
with a sell order, trasmitting confirmation of trade time and price back from
the exchange to the broker and from the broker to the trader.
- Index futures orders can be placed by phone or fax, but most orders today
are placed from a PC connected to the internet.
- A transaction in the more heavily traded index futures on an electronic
exchange typically takes 2-10 seconds, including all the steps from origination
- Unlike commodity futures, there is no physical product, so never a phone
call like, "Where do you want this 5,000 bushels of beans?" The
only thing that changes hands are bookeeping entries on an account statement.
- Index futures can be bought or sold (or sold short) by anyone who has an
account with a futures broker.
- The trader doesn't know the other party involved in the transaction, only
that the transaction was completed.