Global Futures Index Guide: What Are Index Futures and How to Participate in Trading

Investment is most challenging when it comes to selecting the right target, as the actual operational status of most companies is not sufficiently transparent to external investors. To enable investors to clearly understand the price trends of specific industries, countries, or asset classes, major financial institutions have developed various indices to provide intuitive market references. These indices cover a wide range of tracking objects, including baskets of stocks, bond portfolios, and even currency collections. However, since indices are not physical commodities and cannot be traded directly, global futures indices have emerged as financial derivatives that allow investors to participate in index movements.

The core feature of index futures is that their prices depend entirely on the performance of the corresponding index. There are various index futures contracts in the futures market, each with clear trading rules and specific technical specifications. Investors generally use index futures for speculative trading or risk hedging.

What are Index Futures?

Index Futures are futures contracts that track a specific index as the underlying asset. Like all futures contracts, index futures have an agreed expiration date, contract specifications, and margin requirements. But since the index itself is not a physical asset, settlement at expiration is cash-based, unlike gold or crude oil futures which involve physical delivery.

Initially, index futures mainly served the hedging needs of large institutional investors. When institutions hold large stock positions that are difficult to quickly liquidate and expect market weakness, they can hedge by shorting corresponding index futures. As markets developed, index futures are no longer exclusive to institutional players; individual investors also participate widely. Their functions have expanded beyond simple hedging, becoming important investment and trading tools. The variety of index futures has grown richer, covering stock indices, foreign exchange indices, volatility indices, and more, to meet diverse investor needs.

What are the Major Global Futures Indices?

Today’s investment markets mainly focus on “major index futures.” For example, in Taiwan, the underlying of the Taiwan Stock Index Futures (TAIEX futures) is the Taiwan Weighted Index. Major economies worldwide have representative index futures, including:

U.S. Indices

• Dow Jones Index Futures
• S&P 500 Index Futures
• Nasdaq 100 Index Futures

European Indices

• Germany DAX Index Futures
• UK FTSE 100 Index Futures

Asian Indices

• Nikkei 225 Index Futures
• Hang Seng Index Futures
• FTSE China A50 Index Futures

Among these global index futures, the three major U.S. index futures are the most watched. The reasons investors prefer Dow Jones, S&P 500, and Nasdaq 100 futures include:

Flexible Contract Sizes — Besides standard contracts, mini versions are available (e.g., Mini Nasdaq, Mini Dow, Mini S&P 500), with contract sizes only one-fifth of the standard, significantly lowering the capital required to enter and increasing accessibility for small and medium investors.

Strong Index Tracking and Liquidity — The S&P 500’s constituent stocks account for 58% of the US stock market capitalization, Nasdaq 20%, and although Dow Jones has fewer constituents, it has a long history. These three indices are highly correlated with market trends, making it easier for investors to judge future price movements.

Differences in Contract Specifications Across Exchanges

The underlying assets of well-known index futures are usually listed on their respective national futures exchanges, most often traded in local currencies. For example, U.S. index futures are priced in USD, DAX futures in euros, FTSE 100 futures in GBP.

To meet domestic investors’ multi-currency trading needs, many countries also offer international index futures settled in local currencies on their domestic exchanges. For instance, Taiwan Futures Exchange provides TWD-denominated futures on U.S. indices like Dow Jones and Nasdaq. The advantages for domestic traders are that they do not need to exchange currencies and can trade directly in TWD; the disadvantages are fewer counterparties, lower liquidity compared to international exchanges, and potentially larger bid-ask spreads.

It’s also important to note that futures products listed on domestic exchanges follow the trading hours of that exchange, which often differ from international trading hours.

The table below shows differences in contract specifications, trading hours, and fees for index futures listed on various trading venues:

Breakdown of Index Futures Contract Specifications

When investors review contract specifications, besides currency and trading hours, they also want to understand other influencing factors. The most important is leverage multiple. Futures use a margin system, requiring investors to deposit a certain percentage of the contract value as margin, as specified by the exchange and contract rules.

Futures are settled daily; the investor’s account is marked-to-market based on daily price fluctuations (profit/loss), and margin levels are adjusted accordingly. Taking Taiwan’s TAIEX futures as an example, if entering a long position with the minimum initial margin, a decline of just 215 points in the index would trigger a margin call. Even if the index drops less than 2%, if the investor does not top up the margin in time, they risk being forcibly liquidated.

Therefore, it is recommended that investors, whether trading domestically or globally, allocate margin reasonably to effectively manage risks and ensure steady investment progress.

The basic specifications of Taiwan Futures Exchange’s TAIEX futures are as follows:

Advantages and Applications of Global Index Futures

Many investors associate leverage with high risk, but in fact, the original purpose of index futures was for risk hedging. The true advantage of leverage is that it allows risk management with less capital, not necessarily high-risk investing. Therefore, one should not have a stereotypical view of futures; instead, understand and use them appropriately to create more investment opportunities.

The main applications of index futures in the market include:

Hedging Risks

Institutional investors holding large stock positions often find it difficult to adjust their portfolios frequently. During long holidays, economic downturns, or international risk events, they can hedge against downside risk by shorting index futures.

Directional Trading

Investors can make trend-based trades based on market judgment to profit from price movements. Compared to stock margin trading, which typically offers 2.5x leverage, futures can provide ten times or more leverage, amplifying gains. Since futures allow both long and short positions, investors can seek profits whether the market rises or falls.

Spread Arbitrage

Futures settlement prices and spot prices tend to converge over time; during this period, price differences can be exploited for arbitrage. For example, establishing a long futures position and a short spot position simultaneously, then closing both when the spread narrows, can generate relatively low-risk profits. Professional institutions often utilize such low-risk opportunities with leverage.

The core idea is: risk comes from how tools are used, not from the tools themselves. Properly used, global index futures can also generate stable returns for investors.

Ways to Participate in Global Index Futures Trading

After understanding the characteristics and advantages of index futures, if you wish to participate, here are some main methods:

Method 1: Open an account with a local securities futures broker

Open a futures account domestically, deposit funds, and start trading. The advantage is convenience; the downside is that trading volume is relatively small, bid-ask spreads may be larger, and trading costs are higher.

Method 2: Open an account on an international futures platform

Trade through international futures brokers. The advantages include large trading volume, narrow spreads, and good market liquidity; the disadvantages are currency exchange requirements, exchange rate risks, and higher transaction costs due to frequent currency conversions.

Method 3: Track index futures through other financial products

Some financial platforms offer trading products related to index futures, providing flexible specifications, smaller bid-ask spreads, and no physical delivery. Investors can choose the most suitable trading method based on their circumstances and needs.

Common Index Futures Trading Strategies

For investors interested in global index futures, the following strategies are worth noting:

1. Spread Convergence Trading

Multiple futures contracts tracking the same or similar underlying assets may temporarily show widened spreads due to different market participants. When spreads are too large, investors can go long on the relatively cheap contract and short on the expensive one, then close both when the spread converges to realize profits.

2. Intermonth Arbitrage

As futures approach expiration, their prices tend to move closer to spot prices. Investors can trade the nearby month contract and the next month contract simultaneously, exploiting the changing spread for arbitrage.

3. Trend Trading

Some index futures are closely related to long-term policies or economic fundamentals. For example, the US dollar index is linked to Federal Reserve policies, making long-term trends relatively clear. Investors can enter after confirming the trend and leverage to amplify gains.

4. Currency Hedging

Many international trade companies face exchange rate risks. For example, exporters quoting in USD but incurring costs in TWD are directly affected by exchange rate fluctuations. They can hedge by trading futures in relevant currencies to lock in costs or revenues.

Differences Between Index Futures Trading and Stock Trading

For investors new to futures, understanding the concept of margin and how it differs from stock trading can be challenging. The main differences are:

Trading Mechanism

• Stock trading is a “cash-and-carry” spot transaction, paying money upfront and receiving stocks.
• Futures trading involves contracts giving the right to exchange at a future date at a specified price, with no immediate transfer of the underlying asset.

Holding Method

• Index futures do not require actual stock ownership; they settle based on price differences.
• Stock trading involves actual ownership of shares.

Margin and Leverage

• Futures use margin, requiring only a percentage of the contract value as collateral, providing leverage.
• Stock trading requires full payment or margin financing with limited leverage.

Trading Hours

• Some index futures can be traded 24 hours.
• Stock trading is usually limited to exchange operating hours.

Therefore, futures are more suitable for short-term trading based on price movements rather than long-term holding.

Summary

Global index futures are vital tools for investors to participate in worldwide market fluctuations. The tools themselves are neither inherently good nor bad. However, due to their inherent leverage, price volatility can trigger forced liquidation risks.

Investors should diligently learn the rules and characteristics of index futures, develop clear risk management strategies, and strictly follow their trading plans to achieve long-term profitability. Beginners are advised to start with simulated accounts to familiarize themselves with trading procedures and risk control methods, and only proceed with real funds once their skills and psychological readiness are sufficient.