Stock Index Futures Explained

Including short descriptions of well-known stock indices as well as a few that are less well known

What are stock index futures?

In essence, stock index futures are futures contracts that allow traders and investors to buy or sell a stock index at a fixed price today, to be settled on a future date.

Index futures are also called equity index futures or index futures.

What is a stock index?

Simply put, a stock index, also known as a stock market index, measures the value of all the shares or a specific group of shares in a stock market. The value of a stock index is usually determined by measuring the weighted average of the value of the shares included in the particular stock index.

Weighted average considers the varying importance (weight) of the shares included in a stock market index. In order to calculate a weighted average, each share in the index is calculated by a predetermined weight before the final value of the index is determined.

Hence, shares are not included equally in an index.

Market capitalisation is typically used as the basis to calculate the weighted average of a set of shares in a stock index. Put differently, a cap-weighted index is a stock index in which the value of each share in the index is based on the total market value of the outstanding shares of the specific company.

In an index based on market capitalisation, the number of shares per company included in the index is based on the value of the company. The higher the market cap the more shares included and vice versa.

The market capitalisation (market cap) of a company is calculated by multiplying the total number of the outstanding shares of the company by the current market price of one share of the company.

Examples of stock indexes

Globally

At present, there are hundreds of stock indices that can be traded on stock exchanges in different countries. Some of the well-known and most heavily traded stock indexes, also called stock indices, are:

United States of America (USA)

• The Dow Jones Industrial Average (DJIA) is the second oldest stock index in the USA. It tracks 30 large, publicly owned companies, commonly referred to as blue-chip companies, which are traded on the New York Stock Exchange (NYSE) and the Nasdaq. Companies included in the DJIA are Microsoft, Boeing, Goldman Sachs, McDonald’s, and Walmart.

It is one of the oldest and best-known stock indexes in the world. The DJJA is also called the US30, Dow 30, or simply ‘Wall Street’.

For a company to be considered a Dow 30 company, it, amongst other requirements, must:

• Be incorporated in the USA.
• Have its Head Office in the USA.
• Be able to attract a large number of investors.
• Show sustained growth.
• Have an excellent reputation.

In order to qualify as a blue-chip company, a company is required to have a long history of sound financial performance, be well-recognised, well-capitalised, and well-established. In addition, its shares have to be considered fairly safe to invest in. Examples of blue-chip companies are Coca-Cola, Apple, Johnson and Johnson, Pfizer, and Nike.

• The S&P 500 Index

The S&P 500 Index, also known as the Standard & Poor’s 500 Index, comprises the 500 leading publicly traded companies in the USA.

It is an index that is primarily based on the market capitalisation of the companies which are included, representing about 80% of total US market capitalisation.

The S&P 500 is a free-floating market capitalisation index, implying that the outstanding shares used in the calculation of the market cap of a company include only floating shares. This means that closely-held shares of company insiders, such as directors, officers, and certain employees, are excluded.

Hence, only the number of shares actually available for trading is included.

In terms of index weighting, the following five companies were at the top of the S&P 500 list, as of the end of August 2025. (Index weighting is indicated in brackets after the name of the specific company.)

1. Apple Inc. (6.2%) – a major manufacturer of hardware and software products.
2. Microsoft Corporation (5.9%) – best known for its Windows operating system.
3. com Inc. (3.9%) – a major online retailer.
4. Facebook, Inc. (2.4%) – the owner of the largest social networking platform in the world.
5. Alphabet Inc. Class A (2.3%) – the parent company of the search engine Google.

• The Nasdaq Composite Index includes more than 2 500 common equities listed on the Nasdaq Stock Exchange, the world’s first electronic exchange. The index comprises all the stock listed on the Nasdaq Stock Exchange, with the exception of derivatives, preference shares, exchange-traded funds (ETFs), funds, and debenture securities.

The index, commonly called ‘The Nasdaq,’ is weighted heavily towards companies in the information technology sector such as Apple, Microsoft, and Alphabet.

United Kingdom

The FTSE 100 Index (the Financial Times-Stock Exchange 100 Index) represents the 100 biggest companies on the London Stock Exchange (LSE) by market capitalisation – approximately 80% of the LSE’s market capitalisation.

The index includes top companies such as AstraZeneca, Royal Dutch Shell, and BHP (a world-leading resources company).

The FTSE 100 is sometimes called the ‘UK 100’, while it is informally referred to as ‘Footsie.’

Europe

• The DAX, also known as the Deutscher Aktien Index, is a German stock market index consisting of the 40 largest German blue chip companies traded on the Frankfurt Stock Exchange.

The index was historically called the ‘Germany 30’, comprising the top 30 companies on the Frankfurt Stock Exchange, before the number of companies was increased to 40 as of 3 September 2025.

As of November 2025, the top three companies included in the DAX are Linde (a world-leading supplier of industrial and specialty gases), SAP (a German company that specialises in business software), and Siemens (a German technology company focussed, inter alia, on infrastructure, transport, and healthcare).

• The CAC 40 Index tracks France’s 40 top largest companies (in terms of market cap) traded on the Euronext Paris Stock Exchange. It is also a free-floating market capitalisation index and is the most generally used indicator of the French stock exchange.

The CAC derives its name from the Paris Stock Exchange’s early automation system, called the Cotation Assistée en Continu, translated as Continuous Assisted Quotation.

As of November 2025, the top three companies on the CAC 40 were Sanofi (a global leader in healthcare), Total, and BNP Paribas (a French international bank group).

China

• The Hang Seng Index (HSI) is a ‘free float-adjusted market capitalisation-weighted stock market index,’ tracking the largest companies on the Hong Kong Stock Exchange. The top 50 companies represent approximately 60% of capitalisation of the Hong Kong Stock Exchange.

The HSI includes companies such as HSBC Holding plc, Hang Seng Bank Ltd, China Construction Bank (one of the ‘big four’ banks on the mainland of China), and China Life Insurance Company.

• The SSE Composite Index, short form for the Shanghai Stock Exchange Composite Index, consists of all the shares (A and B shares) that trade on the Shanghai Stock Exchange (SSE), the largest stock exchange in the People’s Republic of China.

The index is infamously known for its volatility.

Japan

• The Nikkei 225 Index comprises the top 225 blue-chip companies traded on the Tokyo Stock Exchange (TSE), the largest stock market in Japan.

The index is weighted by price and its components are reviewed annually.

It is named after the sponsor of the index, the Nihon Keizai Shimbun – the flagship publication of Nikkei Inc., and the largest financial newspaper in the world.

Companies included in the Nikkei 225 are, amongst others, Fuji Electric Co Ltd, Yamaha Motor Co Ltd, and Mitsui & Co Ltd (one of Japan’s largest trading companies).

• The Tokyo Price Index, commonly referred to as TOPIX, is a free-floating market capitalisation index, representing Japan’s largest companies by market cap traded on the Tokyo Stock Exchange (TSE).

The index is calculated and published by the TSE.

TOPIX’s list includes the largest companies in Japan, such as Toyota, Keyence Corporation (a global leader in the development and manufacturing of factory automation equipment), and Chugai Pharmaceutical (a company that manufacturers and sells innovative pharmaceutical products in the fields of cancer and infectious diseases.

South Africa

In South Africa, the Johannesburg Stock Exchange (JSE) has, inter alia, the following equity indexes:

• The JSE Top 40 – A basket of the top 40 listed companies on the JSE based on market capitalisation.

The basket of companies comprises, inter alia, companies like Discovery, Clicks, and Capitec.

• The JSE All Share Index (ALSI) is an index consisting of the largest 164 listed companies on the JSE, representative of almost 100% of the market capitalisation on the JSE.

More information about the ALSI can be obtained from SA Shares.

Factors that can affect the movements of a stock index’s price

A stock index’s price can be affected by a variety of factors, including:

• Financial results of companies

Financial performances (profits or losses) of companies reported in their financial statements will cause the rising or decline of their share prices, which can affect the value of a stock index in which the shares of the companies are listed.

• Company announcements

Announcements by companies concerning aspects such as net asset values, performance, changes in voting rights, changes to company leadership, possible mergers, sensitive dealings with other companies, will likely affect share prices.

Company announcements can either affect the price of an index positively or negatively, depending on the contents of the announcement.

• Macroeconomic news

News about the economic performance of a country, as indicated in its GDP (gross domestic product) and national output, central bank announcements regarding interest rates and inflation, and levels of unemployment can affect underlying volatility, causing an index’s price to move upward or downward.

• Changes to an equity index’s composition

Weighted indices can experience a shift in value when companies are added or removed in terms of their market capitalisation. Typically, traders and investors adjust their trading positions to account for the new composition.

• Fluctuations in commodity markets

Prices of indexes that include a significant number of commodity stocks will be affected by any fluctuations in the commodity market.

Features of stock index futures (equity index futures)

• Equity index futures are derivatives. A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying asset or set of assets. Concerning stock index futures, the underlying asset is a stock index.

• As derivatives, stock index futures give traders and investors exposure to movements in the value of an underlying stock exchange index, enabling traders or investors to profit from price movements of a basket of shares of companies without trading the shares of a company listed in the index.

• A stock index futures contract is considered an obligation because it is a legally binding agreement between the purchaser and seller.

• Stock index futures contracts enable investors to buy or sell an underlying stock index at a specific price on a predetermined date in the future (the expiration date).

• Equity index futures are based on a portfolio of shares of companies as represented by a particular stock index. For instance, a stock index as described above under ‘Examples of stock indexes.’

• A stock index future is typically settled in cash. The cash amount is determined by calculating the difference between the futures price agreed upon at the beginning of the contract and the value of the stock index at the expiry date of the contract.

The cash settlement is necessary because the seller of the futures contract is unable to deliver a portfolio of shares in the same proportions as the particular stock index. Contrary to other futures contracts, the seller does not deliver the physical underlying asset but instead transfers the amount of cash as calculated – see the previous paragraph.

When on expiry the price of the particular index exceeds the agreed-upon contract price, the buyer has generated a profit, and the seller has incurred a loss. Should the price of the index be lower than the original contract price, the seller makes a profit, and the buyer is in the red (suffers a loss).

• The cash settlements take place daily on a market-to-market basis.

• Traders are not obliged to raise the full value of the index futures contract when starting a trade. Instead, they are allowed to keep a small portion of the contract amount in their trading account, referred to as the initial margin.

• An investor or trader is required to keep a minimum amount of money in his or her margin account to cover a potential loss, which is known as the maintenance margin. This arrangement is called leverage.

• Values of equity index futures can fluctuate considerably until the contract expires.

• Stock index futures are liquid and easily traded.

• Index futures are best suited to long-term trading, with opportunities for wider spreads.

• Stock index futures trade at different times of the day.

• Normally, equity index futures are traded with the assistance of a futures broker.

• Index futures can be traded with CFDs (contracts for difference) or ETFs (exchange-traded funds), allowing access to stock index futures and mitigating the relatively high risk pertaining to stand-alone stock index futures.

Pros of index futures

• Lower brokerage fees than actually trading in the shares listed in the indices.

• Allow investors and traders to take advantage of price movements in the underlying index.

• Enable investors to diversify their portfolios.

• Provide short selling opportunities, enabling traders and investors to benefit from downward price movements.

• Index futures allow for speculation on price movements of a stock index without having to own the shares on the specific index covered by the futures.

• Enable portfolio managers to use it as a strategy to hedge against potential losses caused by declining share prices.

• Only a small portion of the futures contract’s value is required as a trading margin, providing the opportunity to generate profits with a small investment.

Cons of index futures

• An investor has no voting rights or any other ownership rights in a company that a traditional shareholder of a company would enjoy.

• Futures brokers can demand additional money to maintain the margin account of a trader or investor.

• Unexpected circumstances may cause a stock index to move in a direction opposite from the direction expected or desired.

• The strategy of index futures speculation involves high risk.

• Leverage can cause investors and traders considerable losses, or even to lose their entire investment if a trade goes completely wrong.

• Stock indices are not always accurate.

• Indexes are not always liquid.

Trading stock index futures

As mentioned, stock index futures are derivatives, allowing traders and investors to gain from price movements in an underlying stock index.

Preferably, the services of a futures broker or other professional broker have to be obtained in order to assist with the buying or selling of equity futures contracts.

The values of shares included in a particular stock index fluctuate throughout a trading day, providing continuous liquidity and volatility which allow traders and investors to benefit from changes in share prices.

In order to trade equity index futures, a trader or investor is required to open a trading account with an approved margin with a broker or brokerage.

Steps in the process of trading stock index futures

1. A futures buyer and a futures seller enter an index futures contract, both agreeing to legally close their buying and selling positions at a specific price and on a future date.

2. The buyer speculates on the future price movements of the underlying index.

3. Assuming that the value of the stock index may increase after a specific period of time, the buyer requests a futures broker to place a buy order on his or her behalf.

4. Contrarily, the seller is expecting the price of the stock index to decrease after the specific time period and requests the futures broker to place a sell order on his or her behalf.

5. After the booking of the trading positions of the seller and buyer under the futures contract, they are both obliged to honour the contract at any cost.

6. On the expiry date of the futures contract, the buyer and seller pay and collect the difference between the agreed-upon contract price and the current value of the underlying stock index.

The contract is settled in cash. If the price of the underlying equity index is higher than the price agreed upon in the futures contract, it represents a profit for the buyer and the seller suffers a loss.

Vice versa, if the value of the underlying index is lower than the agreed-upon contract price, the seller is in the black and the buyer incurs a loss.

What is index arbitrage?

Index arbitrage is an investment trading strategy that strives to profit from divergences between actual and notional futures prices. For instance, a trader simultaneously buys (sells) a stock index future of a particular stock exchange while buying (selling) the underlying shares of that specific index.