Futures are contracts which are traded similar to equities. People pay a fixed amount of money up front for a futures contract, then expect to receive the items specified in the contract at future date specified in the contract.
Futures contracts can cover almost anything. There are futures on oil, agricultural products, and a variety of other commodities. Equities traders are especially interested in the futures on stock indices.
Traditionally, large institutional traders who want to accumulate large quantities of stock will start by buying index futures. These are very liquid, so the trader can do this quickly, without moving the market too much. Then, over time, they would sell their index futures and buy the actual stocks they wanted. For this reason, day-traders would watch the index futures; they often serve as a leading indicator, since the large orders start there. Now, with the introduction of the E-mini futures, any trader can use futures contracts to hedge their position, just like the institutional traders do.Back to Glossary Index