Stock index futures

Futures started with crops, but today you can trade futures on all kinds of things. This course focuses on one family: stock index futures. They let you trade the direction of the whole stock market with a single contract.

First, what is a stock index?

A stock index is a scoreboard for a group of stocks. Instead of tracking hundreds of companies one by one, the index rolls them up into a single number. When most of the big companies in the group go up, the index goes up. When they go down, it goes down.

Two indexes matter most in this course.

The S&P 500

The S&P 500 tracks 500 of the largest companies in the U.S. economy. It is capitalization-weighted, which means bigger companies count more. A 1% move in a giant company moves the index more than a 1% move in a smaller one. CME describes the S&P 500 as a key indicator of the health of the U.S. stock market.

The Nasdaq-100

The Nasdaq-100 tracks 100 leading large U.S. companies, and it leaves out financial companies such as banks. It is also weighted by company size, using what is called a modified capitalization weighting. For now, the takeaway is the same as with the S&P 500: bigger companies count more.

The futures that track them

CME lists futures contracts on both indexes. Their trading symbols are short codes you will see on every chart and platform:

“Size of one contract” is called the multiplier. It tells you how many dollars one full point of index movement is worth for one contract. If the S&P 500 futures price moves up 1 point, one ES contract gains or loses $50. If the Nasdaq-100 futures price moves 1 point, one NQ contract gains or loses $20. You will put these numbers to work in Lesson 6.

Don’t let the word “mini” fool you. ES and NQ are the standard benchmark contracts for these indexes. In Lesson 5 you will meet their smaller siblings, the Micros.

Nothing gets delivered

Remember the farmer delivering wheat? Stock index futures do not work that way. There is no way to deliver “one S&P 500.” Instead, both ES and NQ are financially settled, also called cash settled. When a contract reaches its end date, any open position is settled with a cash credit or debit based on its value. No stocks change hands.

Most futures positions are closed before the end date anyway, which you will learn about in Lesson 9.

Why traders use them

One ES or NQ contract gives exposure to the whole index at once. A fund manager can use them to adjust the risk of a large stock portfolio. A speculator can use them to trade the direction of the market. Either way, one symbol stands in for hundreds of stocks.

Key ideas

• A stock index is a single number that tracks a group of stocks.
• ES tracks the S&P 500 at $50 per index point.
• NQ tracks the Nasdaq-100 at $20 per index point.
• Both are cash settled: no stocks are ever delivered.