|
Learn How to Trade Stock Indexes - The Tutorials
An Introduction The first stock index to be traded was the Value Line, introduced on the Kansas City Board of Trade on February 24, 1982. Just a few short months later, the Chicago Mercantile Exchange (CME) launched the S&P 500 futures contract in April of that same year. The S&P 500 is based on the Standard and Poor's Index of 500 common stocks. It is this successful contract that not only garnered individual investors and institutional level investors but fostered a multitude of other stock index contracts traded around the globe. The acknowledged leader is the CME in this space. The CME, according to their statistics do approximately 90% of all domestically traded stock index trading. What are Stock Index Futures? Stock index futures are contracts, or agreements in essence to purchase or sell the value of a specific stock index at a specific day in the future at a specific price. This versatile futures contract can be used for speculators desiring to profit from market fluctuations. Others, from individuals to hedge fund managers may wish to use stock index futures to hedge themselves from adverse market moves to their existing portfolio of actual stocks. This is also known as hedging. Keep in mind that participating in futures trading involves the use of leverage and as such comes with substantial risk. Stock index contracts closely follow the movement of the respect index they mirror. These indexes are sometimes referred to as the underlying market. One of the benefits of participating in the stock index futures market is the versatility to potentially profit from both up and down moves in the market. An investor can purchase an index contract and at a later buy it back, hopefully at a higher price that the index was purchased for, thus potentially earning a profit. Conversely, the investor may believe that the index is going to go lower of a certain period of time. As such they would initially sell (selling short) a contract with the expectation of buying it back at a lower price in the future. Again, this ideally would generate a profitably transaction. Of course, should your prediction be incorrect, you run the risk of losing money was well. Why Trade Stock Index Futures? In our opinion, there are many reasons why investors should consider stock index futures. . Potentially lower transaction costs compared to trading the actual basket of stocks. . Useful tool for hedging a portfolio of stocks. . Due to the electronic nature of most stock index markets and access to worldwide markets the stock index market is amazingly versatile and potentially responsive. . Due to its popularity, many stock index futures contract offer excellent liquidity.
COMMODITY FUTURES, OPTIONS, AND FOREX TRADING INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS. . Many, many indexes are available on a global basis offering the investor the ability to participate in a multitude of markets. Buying vs. Selling - Going Long or Short Just as you may do with your stock investments, the concept of buying low and selling high exists in stock index investing. Investors will to accept the inherent risk may buy a stock index (go long) and ideally sell it for a higher price at a later time. Via the versatility of the futures markets, it is just as common for an investor to sell short, or sell a futures contract first, then buy it back at a later time. Again, hopefully buying it back at a lower price. To recap, if you believe prices are going higher, you "buy," also known as going long. If you think prices will decline, you would "sell," also known as going short. How Long does the Investment Last? You don't need to wait for a futures contract to expire to exit your position. Simply take the opposite position from the one you are currently in to exit. If you are long, sell a contract or if you are short, buy one to exit. For those that wish to take a longer-term stance or position in the market there are a couple of options. One route is to simply buy or sell (depending upon your outlook) a futures contract far enough out in the future to satisfy your expectations. For example, you may believe the stock market is going higher over the next year. You could then buy a futures contract with an expiration one year from now. Another possible strategy is to buy the nearest contract and do what is called "rolling forw... [download for more]
|
