A stock index futures contract is valued based on a multiple of a designated stock market index. There are different futures for the same reasons you will see different stock market indexes highlighted in the news. The index developers put together groups of stocks to track different sectors or features of the stock markets and the overall economy. Futures let traders take positions based on the types of stock a certain index tracks.
Stock Index Futures
An equity index futures is a derivative contract where the value is based on a multiple of a designated stock market index. For example, the popular e-mini S&P 500 futures contract is worth 50 times the current value of the S&P 500 stock index. A trader can take a position on the future value of a selected stock index using a futures contract and a small margin deposit relative to the total value of the contract. On the futures exchanges, many different equity index futures trade to track different indexes from Dow Jones, S&P, Nasdaq and Russell.
Different stock indexes cover or focus on different types of stocks or size of companies. Among the more popular indexes, the Dow Jones Industrial Average tracks the share prices of 30 name brand companies, including IBM, American Express, McDonald's and Coca-Cola. In contrast, the Nasdaq 100 index is very heavily weighted to technology companies, including Apple, Google, Microsoft and Facebook. Another popular index for futures traders is the Russell 2000, which covers the values of small-cap stocks. In the stock market, these different sectors of stocks can change values at different rates, and at times some indexes may be gaining value and others losing.
24/6 Futures Trading
A big difference between the stock market and futures markets are the trading hours. The stock exchanges are open from 9:30 a.m. to 4 p.m. Eastern time, Monday to Friday. The electronic futures market allows trading 23 1/2 hours a day from Sunday afternoon until Friday afternoon. This means that futures trade for 16 hours a day -- night and early morning -- when the stock markets are not open and the value of stock indexes are not being updated. During the hours the stock markets are closed, futures prices are driven by global news and where traders believe the indexes will be valued when the next market day starts.
Morning News Reporting
Before the stock markets open for the day, the financial news outlets report on the equity index futures prices to show what traders expect when the stock markets ring the opening bell. The futures prices compared to the index values you see before 9:30 in the morning reflect what futures traders believe will happen to the stock indexes when the stock exchanges open for trading. During these hours of the day, the futures values can vary due to both the different types of stock and differing supply and demand forces in the futures markets.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.