Maybe it would be better to invest in stock index futures?
Yesterday, when I wrote my last article I had a brain-wave. Perhaps common stocks aren’t the best asset to invest money. And I decided to investigate a question about investments in such securities as stock index futures…
As far as I understand investments in stock index futures are similar to investments in weather futures. You should forecast. And your profits or losses depend on your ability to make good prognoses.
It is necessary to remember that the subject of an agreement of stock index futures is purchase and sale of portfolio of stocks; stocks that go to make up this stock index.
Stock index futures show the dynamics of the stock market or its part (for example, S&P and Dow Jones Transportation Average).
As with ordinary future contracts stock index futures can be used as instruments of speculation or hedge buying.
The example of speculative operation with stock index futures can be:
You have $100000 and the forecast is that the index S&P will grow. Let us suppose that the margin requirement is 5%. Dynamics of index (during the position is open) is: 1230
1245
1240
1256
1270
1263
1275
Price of future contract (when we open position) is: 1230*$500=$615000, margin requirement is $30750, so we buy 3 future contracts. The results of this operation per day are:
1st day: (1245-1230)*500*3=$7500 (profit)
2nd day: (1240-1245)*500*3=$7500 (loss)
3rd day: (1256-1240)*500*3=$24000 (profit)
4th day: (1270-1256)*500*3=$21000 (profit)
5th day: (1263-1270)*500*3=$10500 (loss)
6th day: (1275-1263)*500*3=$12000 (profit)
The payments under the stock index futures clear each day the position is open. And if you bear losses you should insert money on your margin account.
The result of our operation is: (1275-1230)*500*3=$52500!!!
So, to my mind it’s very profitable activity to invest your money in stock index futures:).