Global Index Futures Complete Guide: An Investment Handbook from Beginner to Expert

Why Do You Need Index Futures?

The biggest challenge in investing is choosing the right investment target. The true condition of a company is often a mystery to outsiders, which is why the market needs a tool to intuitively reflect the overall performance of a certain industry, country, or asset class.

Index products emerged—they are measurement tools compiled by professional institutions, covering a basket of stocks, bonds, or currencies. However, indices themselves are not tradable commodities, which led to the emergence of global index futures. As financial derivatives, index futures’ prices directly track the performance of their respective indices, providing investors with a new way to participate in global markets.

Understanding the Core Features of Index Futures

What are index futures?

Index futures are futures contracts based on an index as the underlying asset. Like all futures contracts, they have a specific expiration date, contract specifications, and margin requirements. But because an index is not a physical asset, they are settled in cash at expiration, unlike gold or oil futures which can involve physical delivery.

Initially, index futures mainly served institutional investors, helping them hedge investment risks. When institutions hold large positions that are difficult to sell quickly or are bearish on the market outlook, they can hedge by shorting corresponding index futures.

Today, the application scope of global index futures has long expanded. Retail investors participate widely, and trading functions have evolved from pure hedging to combine speculation and hedging. The types of index futures are also continuously enriched, including stock indices, exchange rate indices, volatility indices (VIX), etc., to meet diversified investment needs.

Leverage: A Double-Edged Sword

Futures operate on a margin system. Investors do not need to pay the full contract value; they only need to deposit a certain percentage as margin to control the full value of the contract. For example, in Taiwan stock index futures, if the index is 17,000 points and the contract value is 3.4 million, investors only need to deposit NT$184,000 as initial margin, achieving approximately 18.4x leverage.

This leverage design is both an advantage and a risk. The advantage is that small capital can participate in large positions; the risk is that price fluctuations exceeding a certain range will trigger margin calls or forced liquidation. For instance, a decline of 215 points (about 1.3%) in the Taiwan index futures can breach the initial margin level, and if the investor does not top up in time, the position will be forcibly closed.

Main Types of Global Index Futures

Global index futures markets offer a rich variety of trading products. The most mainstream are ‘major index futures,’ tracking the overall performance of stock markets in various countries. Key examples include:

U.S. Market

• Dow Jones Index Futures
• S&P 500 Index Futures
• NASDAQ 100 Index Futures
• Mini versions (contract size is 1/5 of the standard contract)

European Market

• Germany DAX Index Futures
• UK FTSE 100 Index Futures

Asian Market

• Nikkei 225 Index Futures
• Hang Seng Index Futures
• FTSE China A50 Index Futures

The reason why the three major U.S. index futures are favored is due to their high component stock market capitalization (S&P 500 accounts for 58% of U.S. stocks, NASDAQ 20%), strong index tracking ability, and ample liquidity. The introduction of mini contracts further lowers the entry barrier, allowing small and medium investors to participate.

Differences and Choices Among Different Exchanges

Global index futures listed on various exchanges show significant differences, and investors need to understand these thoroughly.

Currency Pricing Differences

Most index futures are traded in local currencies. U.S. indices are in USD, DAX in euros, FTSE 100 in GBP. To meet domestic investor needs, many exchanges also offer versions in local currencies—for example, Taiwan Futures Exchange provides TWD-settled Dow Jones and NASDAQ futures.

The advantage of local currency versions is that no currency exchange is needed, but the downside is fewer counterparties, lower trading volume, and wider bid-ask spreads. International versions, on the other hand, have ample liquidity but involve currency conversion costs.

Trading Rules and Cost Comparisons

Contract specifications vary significantly across exchanges:

Differences in trading hours stem from the operating hours of each exchange. Local exchanges’ schedules are not synchronized with international markets, which can impact short-term traders needing timely position adjustments.

Investment Advantages of Index Futures

Although leverage introduces risks, the original purpose of index futures—hedging—still highlights its core value:

( 1. Efficient Hedging

Institutional investors holding large spot positions but unable to sell quickly can hedge systemic risks by shorting index futures. This is faster and cheaper than selling stocks one by one.

) 2. Directional Gains

For investors bullish or bearish on the market, index futures offer leveraged profit mechanisms. Compared to stock margin trading at 2.5x leverage, futures with 10x to 20x leverage significantly amplify profit potential. Additionally, the ability to go long or short means profit opportunities exist regardless of market direction.

( 3. Arbitrage Opportunities

The convergence of futures and spot prices creates low-risk arbitrage space. Investors can simultaneously go long futures and short spot (or vice versa) to lock in price differences.

) 4. 24-Hour Liquidity

Some global index futures offer nearly 24-hour trading windows, allowing investors to enter and exit positions at any time without waiting for specific trading hours.

Three Ways to Invest in Global Index Futures

Method 1: Domestic Futures Exchange

Open a futures account at Taiwan Futures Exchange, deposit funds, and trade TWD-denominated index futures.

Advantages: Easy account opening, convenient fund deposits and withdrawals
Disadvantages: Lower trading volume, wider bid-ask spreads, higher costs

Method 2: Overseas Futures Brokers

Open an account with an international futures company to trade USD-denominated global index futures.

Advantages: Large trading volume, narrow spreads, low costs
Disadvantages: Involves currency exchange, exposure to exchange rate fluctuations

Method 3: Contracts for Difference ###CFD###

Trade indices via licensed CFD providers without holding or delivering actual contracts.

Advantages:

• Flexible specifications, minimum trading units can be as small as 0.01 lots, no “one lot” limit
• No expiration date, no rollover issues
• USD-denominated, no exchange rate risk
• 24-hour real-time trading for long and short positions
• Smaller bid-ask spreads
• Provides risk management tools (take profit, stop loss, trailing stops)

CFDs are more flexible than other methods, especially suitable for small traders and short-term operators.

Common Index Futures Trading Strategies

Spread Convergence Trading

Tracking the movement of the same or similar underlying indices usually shows high correlation, but due to different market participants, spreads can sometimes widen. Investors can buy one and sell the other when spreads widen, then close both when spreads narrow for profit. This is a relatively low-risk strategy.

Inter-Contract Arbitrage

There is a time spread between near-month and next-month futures. As expiration approaches, spreads tend to converge significantly. Investors can exploit this by buying near-month and selling far-month (or vice versa) to profit from convergence.

( Trend Following

Some index futures’ movements are closely related to macro policies. For example, the US dollar index is directly linked to Federal Reserve interest rate policies and dollar strength. Once the policy direction is clear, investors can leverage trend-following strategies to achieve stable returns.

) Hedging

Companies or institutions often face exchange rate or market risks. For example, Taiwanese businesses quoting in USD but paying costs in TWD can hedge currency risk by buying or selling USD futures. Such hedging protects profits and also creates arbitrage opportunities for investors.

Index Futures vs. Stock Trading

For investors new to index futures, understanding the fundamental differences from stock trading is essential:

Trading Nature

• Stocks: Pay money and receive shares, owning a part of the company
• Futures: Purchase the right to settle at a future date at an agreed price

Capital Requirements

• Stocks: Full payment of stock price (or financed via margin)
• Futures: Only margin (usually 5%-20% of contract value)

Settlement Method

• Stocks: Actual ownership, dividends and stock splits credited directly
• Index futures: Daily settlement of gains/losses, cash settlement, no physical delivery

Trading Hours

• Stocks: During exchange operating hours (usually 9:00-15:30)
• Global index futures: Many offer extended or 24-hour trading

Risk Characteristics

• Stocks: Risk proportional to holding period, suitable for medium to long-term investment
• Futures: Leverage amplifies short-term volatility risk, suitable for short-term trading

Due to the leverage and short-term volatility, futures are more suitable for experienced investors with strong risk awareness and are not recommended for long-term holding.

The Importance of Risk Management

Global index futures’ leverage makes risk management critical. High leverage means small fluctuations can trigger margin calls or forced liquidation.

Precautionary Measures

1. Margin Management: Avoid trading at the minimum margin. It’s recommended to reserve an extra 20%-30% margin buffer to reduce the risk of forced liquidation.

2. Stop Loss Setting: Always set clear stop-loss levels for each trade to limit maximum losses.

3. Position Sizing: Risk no more than 2%-3% of your total account per trade to prevent a single loss from destroying your account.

4. Trailing Stops: Use trailing stops on profitable positions to lock in gains and prevent profit erosion.

5. Regular Review: Keep records of each trade, analyze successes and failures, and continuously optimize your strategy.

Summary

Global index futures open the door for investors to participate in the global market. They are not high-risk gambling tools but carefully designed hedging and trading instruments. Their danger comes from misuse, not the tools themselves.

Investors should first deeply understand their operation mechanisms, contract rules, and risk characteristics, then choose appropriate trading scales and strategies based on their risk tolerance. Start with simulated trading, accumulate experience gradually, strictly adhere to risk management discipline, and only then can you achieve steady profits in the global market. Remember: the best trading is not the most profitable, but the one that lasts the longest.