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Index Futures: Simple Explanation and Practical Example

Index futures are a financial instrument that allows investors to earn on the change in the value of stock market indices. These contracts allow you to speculate on the future price of the index, without having to physically buy the shares that comprise it. In this way, investors can make profits even in the event of market declines. In this article, we’ll explain in a simple way how index futures work and provide a practical example to help readers better understand this financial instrument

What are index futures?

Index futures are standardized contracts that allow you to speculate on the future price of stock indices. These contracts require an agreement between two parties: the seller and the buyer. The seller undertakes to deliver a certain number of shares of the underlying index at the end of the contract, while the buyer undertakes to pay the agreed price for the purchase of these shares.

How do index futures work?

Index futures are based on the idea that the price of the underlying index may rise or fall in the future. Investors can buy a futures contract if they believe that the price of the index will rise, or sell a futures contract if they believe that the price of the index will fall. Either way, the investor can make a profit.

Practical example

Let’s say that the FTSE MIB index has a current price of 20,000 points and an investor believes that the price will rise in the coming months. The investor can purchase a futures contract that expires in three months, at a price of 21,000 points. If the price of the index exceeds 21,000 points at the end of the contract, the investor will earn a profit equal to the difference between the purchase price of the contract and the current price of the index. Conversely, if the price of the index is below 21,000 points, the investor will suffer a loss.

What are tick quizzes in futures contracts?

Tick quizzes are a unit of measurement used to indicate the minimum change in the price of a futures contract. In many cases, a tick quiz corresponds to 0.25 points on the underlying index.

Futures investing indices

Futures indices are also an instrument used by professional investors. The latter use futures indices to hedge the risk of investing in stocks or other financial instruments. In this way, investors can protect their investments from possible market declines.

Italian Stock Exchange

The Italian stock exchange also offers the opportunity to invest in index futures. Among the available futures, there are those on the FTSE MIB index, the FTSE Italia Mid Cap index and the FTSE Italia Small Cap index.

Conclusions

Index futures are a financial instrument that can offer investors attractive earning opportunities. However, like any financial instrument, index futures also have risks. It is therefore important to inform yourself properly before investing in this instrument. A good investment strategy involves diversifying the portfolio, using hedging instruments and prudence in choosing the contracts to buy.

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