The stock market news networks and financial websites often discuss the futures prices of the stock market, especially early in the day before the market opens. In the derivatives industry, futures trading takes place on different markets from the stock exchanges, and can provide an indication of the future direction of the stock market. Stock market futures are also a way for traders to make decisions on the future direction of the market.
What Does Futures Mean?
Futures contracts are derivative securities that trade on the commodities and futures exchanges. Historically, futures contracts were for the future delivery of commodities like corn, coffee and pork bellies – bacon. The selection of futures contracts has expanded significantly and includes a range of futures on financial products including the major stock market indexes. Stock market futures are contracts that have their value based on a specific stock market index.
Read more: What Are Premarket Futures?
Futures Contracts Trading
Futures contracts trade against the values of the major stock market indexes of the S&P 500, Dow Jones Industrial Average and NASDAQ 100. The value of these futures contracts are watched by stock market observers whether or not the want to do any actual futures trading. Other futures contracts trade on more focused stock market sectors, such as the financial sector, technology sector or small cap stocks.
Significance of Futures Trading Hours
The futures market for contracts on stock indexes trades from Sunday afternoon until Friday afternoon during the week. Electronic trading for futures is open almost all day. These extended trading hours means the futures on stocks are reacting to market news when the stock market is closed. Stock market observers and investors look at the value of the stock market futures before the market opens to get an indication of how the market will perform once the opening bell has rung.
Relationship Between Futures Trading and Stock Indexes
During the hours the stock exchanges are open, the value of the stock index futures contracts closely track the value of the stock indexes. When the stock market is closed, the futures contracts change in value if there is breaking news or in response to the Asian and European stock markets. At the open of the stock market, the major indexes of the Dow, S&P 500 and NASDAQ do not have to follow the lead of the futures prices, but often the futures are a good forecast of the opening moves of the stock market.
Read more: What Is Rollover in Futures?
Future Contracts as Market Forecast
Stock market investors can track the value of the futures contracts before the stock market opens to get a forecast of the market day. The major financial websites have a web page dedicated to the value of the stock index futures. Futures trading allows traders to make decisions based on moves in either direction of the stock market, up or down. Futures are well suited to day or swing trading.
The commodity and futures markets have developed e-mini contracts on the Dow, S&P 500 and NASDAQ 100 for use by individual traders.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.