Stock Index Futures: Standardized futures contracts based on stock indices

Stocks are traded on the spot, while stock index futures are traded by the buyer and seller based on the stock index price for a certain month in the future. Stock index futures contracts are standardized agreements uniformly formulated by exchanges and are the object of trading in the stock index futures market.

The main ones include:

(1) The subject of the contract is the underlying asset of a stock index futures contract. For example, the subject of the Shanghai and Shenzhen 300 stock index futures contract is the Shanghai and Shenzhen 300 stock price index;

(2) The contract value is the product of the index point of the stock index futures contract market price and the contract multiplier;

(3) The unit of quotation and the minimum fluctuation price. The price unit for stock index futures contracts is the index point, and the minimum fluctuation price is the minimum change scale for that index point;

(4) Contract month, that is, the month when stock index futures contracts expire and are delivered;

(5) Trading time refers to the starting and ending period for stock index futures contracts to be traded on the exchange. There may be special regulations on the trading time of the last trading day;

(6) Price limits, which limit the price of a contract can rise or fall in a certain trading day or time period;

(7) Margin. Spot goods are traded at full price, while futures are traded using a margin that accounts for a certain percentage of the total contract value;

(8) Delivery method. Stock index futures use cash delivery, not contract handover;

(9) The last trading day and delivery date. The exact date is as stipulated by the exchange, and stock index futures contracts are delivered through cash settlement of the difference on the delivery date.

What is the “main contract” of stock index futures?

If stocks are covered, you can keep waiting for the stock market to rise. However, stock index futures futures contracts have a life cycle. They have to be delivered and settled after the market closes on the last trading day of the contract month, so stock index futures contracts cannot be “held on” all the time like stocks. China's stock index futures contracts include monthly contracts for the current month, next month, and the next two quarters. For example, on December 1, 2016, there were four Shanghai and Shenzhen 300 stock index futures that can be traded: IF1612, IF1701, IF1703, and IF1706. “16” indicates 2016, “12” indicates December, and “IF1612” indicates a delivery settlement contract due in 2016/12.

The so-called main contract is the contract with the largest holding volume, usually the largest trading volume, the most active, and the most liquid among the four contracts that exist simultaneously on the market. Combining recent monthly contracts and quarterly monthly contracts, a total of four contracts are traded at the same time in about half a year, which has both long and short, and relatively concentrated effects.

Four major differences between stock index futures and stock trading

Before officially participating in stock index futures trading, investors need to understand how it differs from traditional stock investing. First, stock index futures contracts have an expiration date and are “overdue”, so investors must pay attention to the expiration date of the contract and close their positions early or pay in cash. Second, stock index futures are traded on margin. They do not require full payment like stock trading; they only need to provide a “deposit” that accounts for a certain percentage of the contract value, that is, what we often call a security deposit, which can be traded. The third is a two-way transaction. Stocks can only be bought first and then sold, while stock index futures can either be bought first and then sold during periods of decline. Fourth, the settlement method. Since the stock is traded at full price, no amount of loss exceeds the amount paid, so no additional capital is required. However, when stock index futures lose money, the investor account's security deposit balance may be insufficient. Therefore, stock index futures adopt a same-day debt-free settlement system, which limits investors to make up their security deposit within a specified period of time; otherwise, positions will be forcibly closed.

Three main characteristics of stock index futures

In summary, stock index futures have the following three characteristics: the first is intersectionality. Stock index futures trading is based on future expectations, and the accuracy of the expectations directly determines the profit and loss of the investment. The second is leverage. Investors only need to pay a certain percentage of security to sign contracts with greater leverage. Of course, while gains may be exponentially magnified, losses are also likely to be exponentially magnified. The third is connectivity. The price of stock index futures is closely linked to changes in its underlying asset, the stock index, and its trend is influenced by spot fundamentals. Market risk can be divided into two types of risk: unsystematic and systemic risk. Non-systemic risks can be minimized through diversified investments, while systemic risks can be hedged using the shorting mechanism of stock index futures. By selling stock index futures contracts, it is possible to hedge against the risk of an overall decline in the stock market and effectively reduce losses caused by collective stock sell-offs.