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What are index futures?

What are index futures?

Index futures are futures contracts written on an index in which a large position can be held with a relatively small margin requirement. Index futures can be used for hedging or speculation.

A "good faith" initial margin deposit (also called a performance bond) of a fraction of the contract size is all that is required to hold a substantial position, with a notional value worth significantly more than the amount invested.

Index futures experience gains and losses based on the movement of the index, and each specific percentage amount ("tick", which are different units for different contracts) of movement will translate to a specific amount of gain or loss.

The gains experienced will be above the initial margin, and losses will use up the margin deposit with the remainder due out-of-pocket for the investor. Index futures can be day-traded or held for a length of time.

If they qualify as 1256 Contracts, the IRS taxes them as 40% short term capital gains and 60% long term capital gains, which can be advantageous. Index futures whose contract size was too large for the average investor gave rise to "mini" and "micro" versions. Index futures are a part of leveraged ETFs and other pooled investments.

Keywords: capital gains and losses, risk, Exchange Traded Funds (ETFs), margin, Futures, performance bonds, leveraged ETFs, index funds,