S&P Futures. How Does it Work? Uses and Why to Invest

The S&P futures contract is a cash-settled, index-based derivative that represents the performance of an underlying basket of stocks. It provides investors with exposure to stock market returns without having to own shares in individual companies or sectors. Investors can use this product as part of their overall investment portfolio and for trading purposes. In fact , it's one of the most popular options contracts traded on exchanges around the world. SPX ETF - SPY | Stock Market & Financial Investment News : Stocks are up today after the Dow Jones Industrial Average closed above 10,000 points for the first time ever yesterday.


How Do S&P Futures Work

The S&P futures 500 Index is composed of 50 large U.S.-traded companies that make up about 80% of total industry sales. These companies represent approximately 85% of all corporate profits earned by American businesses. They also account for more than 90% of America’s exports. This means that when you invest in the S&P 500, your money will be invested in some of the largest corporations in the United States. The S&P 500 has been used as a benchmark since 1927 because its components have historically performed well over long periods of time. For example, during the past 100 years, the average return of the S&P 500 was 9%. During the same period, the Standard & Poor’s Composite Bond Index returned 8%, while the NASDAQ Composite Index returned 12%.


What Are Some Uses Of S&P Futures?

Investors who want to speculate on future price movements may find using S&P futures useful. If you think the value of the S&P futures will rise, then buying S&P futures allows you to profit from rising prices before they occur. Conversely, if you believe the S&P futures is going down, you could sell them at lower prices. You would lose less money if you sold them early enough so that you didn't pay too much for them.

However, selling short involves risk. Selling short requires borrowing shares from someone else and agreeing to buy those shares back later at a higher price. When you borrow shares, you must repay the loan plus interest. So, there is always a cost involved in selling short. Also, if the share price rises between the date you borrowed the shares and the day you agree to repurchase them, you'll end up paying even more than what you originally paid.

Why Should I Invest In S&P Futures Instead Of Buying Shares Or Bonds?

If you're looking for ways to diversify your investments, consider investing in S&P futures instead of purchasing bonds or other securities. While both products offer similar benefits, each comes with different risks. With S&P futures, you don't need to worry about how many shares you purchase; rather, you only need to decide whether to go long or short. On the other hand, bond purchases require careful planning. You should carefully weigh the pros and cons of these two types of investments before making any decisions.


Features of S&P Futures

There are several features associated with S&P futures:

1) Cash Settlement – Unlike traditional equity derivatives such as call options, which settle based on the difference between the strike price and current spot price, S&P futures settle immediately upon expiration. As soon as the final settlement occurs, the buyer receives his/her payment and the seller takes possession of the shares.

2) No Shorting – Because S&P futures do not involve actual ownership of the underlying security (i.e., stocks), it's impossible to "short" an index like this one. That said, investors can still use leverage to increase their exposure to stock market returns without actually owning the stocks themselves. Leverage refers to the amount of cash needed to trade a position. To illustrate, imagine that you own $10 worth of S&P futures contracts. Your investment represents 10% of the overall contract size. Now suppose that the S&P 500 closes today at 1,000 points. At the close, the contract settles at 1,100 points. Since you bought 10% of the contract, you'd receive $110. But wait! What happens next? Suppose that tomorrow morning, the S&P 500 opens at 1,200 points. By opening, we mean that the first trading session begins at 9 am EST. The closing bell rings at 4 pm EST. This means that by the time the exchange closes its doors, the S&P has already moved 20 points higher. Therefore, when the exchange reopens at 8am EST the following morning, the S&Ps have closed at 1220 points. Thus, your original $110 gain becomes $120.

3) Liquidity - A major advantage of S&P futures over other derivative instruments is liquidity. For example, let's say that you want to sell some S&P futures but find yourself unable to get into physical contact with another investor who wants to take delivery of the shares. If you try to sell directly through the NYSE, NASDAQ, etc., you may be forced to pay hefty fees. Alternatively, you could place a limit order, hoping that someone will step forward to fill your request. Unfortunately, most traders prefer to avoid placing orders unless they know exactly where prices stand.


In contrast, if you buy S&P futures, there's no reason why you couldn't simply walk up to a broker and ask him/her what the best bid-ask spread is. After all, brokers aren't going anywhere until after the markets open. And since futures trades typically occur during regular business hours, you'll likely have access to more information than you would otherwise.

4) Hedging – Another benefit of using S&P futures is that they provide a way to hedge against rising interest rates. When interest rates rise, the value of corporate debt generally falls because companies must issue new debt to finance operations. However, S&P futures allow you to offset those losses by buying calls on the same index. Essentially, you're betting that interest rate increases won't happen. Of course, you also run the risk of losing money if interest rates fall.

5) Taxation – Finally, note that unlike many other derivatives, S&P futures are exempt from federal income tax. As long as you don't make any profits off these transactions, you shouldn't owe taxes on them.

S&P Futures: Frequently Asked Questions

1) How much does S&P futures cost?

The answer depends upon whether or not you choose to invest in individual securities instead of the entire index. Let's assume for now that you decide to go with the latter option. Then, assuming that you purchase 100 contracts, each contract costs about $9 per share. So, if the S&P 500 rises 5%, then you should expect to earn approximately $45 per contract.

2) Can I short S&P futures?

No. Although S&P futures are similar to options, they differ significantly enough so that they cannot be used to bet against the market. Instead, you need to look elsewhere for ways to profit from falling equity values.

3) Why might I want to hold S&P futures? Are they risky?

Yes, holding S&P futures involves taking on significant risks. First, remember that futures contracts represent only a portion of the total number of outstanding shares. Second, even though the price of the S&P 500 tends to move in tandem with the broader economy, it doesn't always follow suit. Third, while futures contracts tend to settle quickly, they often require several days before final settlement occurs. Fourth, just because something is settled doesn't necessarily mean that it was profitable. Remember: You never lose anything until you've earned it.

4) What happens when the S&P 500 drops below its current level?

If the S&P 500 declines below 1,500 points, then investors can exercise their right to liquidate their positions at face value. This means that you'd receive back whatever cash you invested plus an additional premium based on how far below 1,500 the index has fallen.

Bottom Line

In summary, while S&P futures might seem complicated, they offer several advantages for both individual investors and institutions alike. So before you decide whether or not to invest in S&P futures, consider how much risk you're willing to assume. Also keep in mind that although futures are traded on exchanges such as the CME Group and CBOE, they are NOT regulated by the CFTC. Instead, each exchange sets its own rules regarding margin requirements, settlement procedures, etc.