What Is a Stock Index Future?

Answer:
A stock index is group of stocks whose

value is a standard (or benchmark) for the general movement of a particular type of stock. A stock index future is a futures contract where the basic commodity is a stock index. Each contract is to purchase or sell a fixed value of the index. Because stock indexes can’t be traded directly, futures based on the stock indexes are the chief method of trading stock indexes. Trading in stock index futures was introduced by the Kansas City Board of Trade.

The operation of index futures is similar to that of the stock market. Index futures are basically like currency and commodity futures markets; however, index futures utilize the “marking-to-market” principle – portfolios are adjusted to market value daily. Index futures are based on the prices of numerous separate companies and are traded in terms of numbers of “contracts.” Index futures are settled on a cash basis instead of delivery of stock certificates. Therefore, if an investor is holding a futures contract at the time it expires then the final price (or settlement) will be determined using the final settlement price. The difference between the cash and the futures index upon settlement date is the profit or loss for the investor.