How Futures Trading Contract Works?

When you buy a future contract, it could be closed-out or liquidated later by an opposite offsetting sell transaction. Alternatively, you could also hold or keep the contract until its expiration date.

Whether you liquidate your contract by an opposite transaction or hold it until expiration, the settlement of your profits or losses will be by cash and no physical or electronic delivery of shares are involved.

Advantages of Index Futures Trading

Index futures trading can therefore be quite advantageous. You actually trade the overall stock market movement rather than the movement of a single stock.

If an investor therefore has good reasons to expect a country's stock market to rally but is not sure which is the best stock to buy, he can actually buy the underlying stock index futures.

Stock index futures would allow him to participate in the overall market movement based on the movement of a basket of stocks represented in the index.