A derivative or other second-order byproduct exists when a security trades publicly. Put options, REITs, and rainbows are all contingent on an underlying stock, 澳洲幸运5官方开奖结果体彩网:real estate, or even multiple stocks. The same byproducts exist with futures. They're contracts on which you’re betting whether a 澳洲幸运5官方开奖结果体彩网:commodity will rise or fall in price by a certain date.

Understanding Future Contracts

Buying and selling futures is the art of transferring risk. The commodity ♕that acts as the underlying security can be perishable such as cattle or wheat or nonperishable such as silver or platinum It can even be something intangible like a market index. 

A stock market index such as the 澳洲幸运5官方开奖结果体彩网:Dow Jones Industrial Average or the 澳洲幸运5官方开奖结果体彩网:S&P 500 is just a numberꦆ that represents a collection of stock prices manipulated arithmetica🧔lly. The index is a quantity but not really of anything you can taste or touch.

We can add another level of abstraction, however, and create a 澳洲幸运5官方开奖结果体彩网:futures contract for a stock index. Speculators can take positions with the resulting index futures contract on what direction the market-at-large will move. These sp🔯eculators are buying or selling a number.

Futures Pricing Example

E-Mini S&P 500 futures contracts expire and settle mid-quarter. The E-Mini closed at $6,001.75 on Dec. 20, 2024. The next three upcoming closing dates for futures will be March 21, 2025, June 20, 2025, and Sept. 19, 2025. Let's look at some hypothetical closing prices for those dates:

• March 2025 trading at $5,936
• June 2025 trading at $5,850
• September 2025 trading at $4,760

March and June would hurt somewhat and the September closing would be a substantial loss. Will the market lose another 7.9% of its value by December 2025? Collective wisdom has determined that $4,760 is the point at which speculators en masse have agreed to meet.

It’s like betting on a point spread for a football game. Let's say Team A is favored to beat Team B by 3 points in an upcoming game. That spread number need not be an accurate representation of the teams’ 澳洲幸运5官方开奖结果体彩网:relative strengths. It means 🌜that a wee bit more of the marketplace has committed money to the proposition of saying “yes, they will” as saying “no, they won’t.” Undue pessimism or optimism about the game's outcome will distort the ꧃spread.

Factors That Influence Price

Why do the prices of upcoming futures trend downward rather than up or even j🌄ust stay neutral? The usuಞal suspects are to blame: economic uncertainty, unimpressive growth, or perhaps a base level of political agitation.

Buy an index fund that tracks the Dow or the S&P 500 and you can expect to pay a certain price t൲hat’s directly proportional to the level of the index itself. The two fluctuate in step or close to it.

One significant difference between stock index futures and index funds is that index futures don’t take dividends into account. An index fund holds positions in the various stocks that make up the index. It's eligible for whatever dividends those companies’ managers decide to pay out to 澳洲幸运5官方开奖结果体彩网:shareholders. An instrument as abstract as✨ a stock index future doesn’t hold a position in the stocks that make up the index a♉nd it therefore doesn’t hold any potential for dividends.

The Bottom Line

Stock index futures operate differently from futures contracts for more palpable securities such as cotton, soybeans, or Texas light sweet oil. The 澳洲幸运5官方开奖结果体彩网:contract holders deliver virtually nothing other than the funds to set𓂃tle the contract when the index futures contracts come due.

Stock index futures are purchased by 澳洲幸运5官方开奖结果体彩网:portfolio managers who merely want to hedge against potential losses. Stock index futures represent an efficient method of transferring risk in a market that can be volatile, however, whether they're held by a conservative 澳洲幸运5官方开奖结果体彩网:fund manager or a reckless 澳洲幸运5官方开奖结果体彩网:speculator who's looking for an obscure new instrument.

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