Stock market futures, also known as equity index futures or market futures are futures contracts that track a specific benchmark index like the S&P 500.
Market futures allow traders to hedge equity positions, trade the direction of the underlying equity index, and be used as a lead indicator for the markets and stocks.
However, Stock market futures contracts expire every third Friday of each quarterly month, starting from March.
Expired market futures are rolled over into the next expiration month contract, and trading volume moves from the expiring contract to the upcoming expiration month contract.
How Are Stock Market Futures Calculated?
Market futures value is based on the price of the market futures contract and the present cash rate of the underlying index.
The methods to calculate the market future value of the S&P 500 contract is derived by taking the current S&P 500 index cash value and multiply by [1+interest rate (x/360)] – dividends of all the S&P 500 component stock.
How Are Stock Market Futures Used?
The futures market is a marketplace for sellers and buyers from around the world who meet and enter into futures contracts.
Market futures contracts can be traded short or long to profit from directional moves.
Market Futures are widely used by portfolio managers to hedge both short and long positions. No rules are states that traders should short-sell on the inside bid prices.
The Benefits of Stock Market Futures
The main benefit of participating in a market futures contract is that it eliminates the uncertainty about the stock market future price.
This futures contract can be advantageous in limiting the risk exposure that an investor has in stock trading.
Besides, companies can eliminate the uncertainty of expected profits and expenses by locking in a price for which they can either buy or sell a particular stock.