Index Futures Description

• An index futures contract is worth a set multiple of the tracked index. For example, the NASDAQ 100 futures are valued at 100 times the NASDAQ 100 stock index. If the index is at 2,350, one futures contract is worth $235,000. To take a position in one futures contract, the trader must put up a margin deposit, the amount determined by the futures exchange. The margin requirement for the NASDAQ 100 futures is $17,500 as of July 2011. E-mini futures exist for stock indexes with smaller futures values and lower margin requirements.
  
  

Long and Short

• A futures contract can be traded in either direction. The terms "long" and "short" are used to differentiate which direction will be profitable for a trade. If the trader opens a position with a long order, the value of the trader's position will increase if the stock index goes up. A short futures trade profits if the stock index declines. An opposite trade order, short or long, is used to close a futures position. Going long on index futures is a trade strategy to profit from an increase in value of the specific stock market index.
  
  

Profit Potential

• Using futures to go long on the stock market provides a high level of profit potential to traders. For example, if the NASDAQ gains 10 percent, an investor trading an NASDAQ 100 exchange-traded fund (ETF) would earn 10 percent on whatever amount he invested. A leveraged ETF could boost the gain to around 30 percent. A trader using futures contracts would earn $100 for each one point gain in the index. Using the example value of 2,350, a 235 point gain is a $23,500 profit on the $17,500 margin deposit or a 130 percent gain on investment.
  
  

Futures Considerations

• The major risk of going long on futures is a rapid and large loss if the market goes down instead of up. In futures trading, it is possible to lose more than the initial margin deposit amount. One positive aspect of futures trading is that the futures markets are open 23.5 hours a day, five days a week. Futures positions can be opened overnight or early in the morning to profit from expected opening moves in the stock market indexes.