Stock Index Futures and Derivative Trading

Futures trading usually involves two parties: a buyer and a seller. It is a transaction of a specified quantity and quality of a goods or financial instrument at a specific price and time of delivery that is determined at the time of purchase and sale.

The main economic purpose of futures is to enable corporations and individuals to protect themselves from the risk of price movements on their assets and liabilities by buying or selling futures to offset possible price movements against them.

As these futures markets and instruments are active, liquid and cost effective, institutional and individual investors have also been able to use such markets and instruments to trade and arbitrage for profit.

What is Derivatives Trading?

Futures trading is just one category of derivatives trading. Derivatives are financial instruments (contracts) that do not represent ownership rights in any asset but, rather, derive their value from the value of some other underlying commodity or other asset.

When used prudently, derivatives are efficient and effective tools for isolating financial risk and "hedging" to reduce exposure to risk.

Derivative contracts transfer risk, especially price risk, to those who are able and willing to bear it. How they transfer risk is complicated and frequently misinterpreted.

High Return High Risk

Derivatives have also been associated with some spectacular financial failures and with dubious financial reporting. You want to be cautious with any form of derivatives trading.