Question

Class, what is the primary purpose of investing in Stock Index Futures?

Name any 3 advantages of investing in Stock Index Futures vs. individual stocks.

Answer 1

The primary purpose of investing in Stock Index Futures is to speculate on future stock price performance and hence gain more leverage. Secondly investing in Stock Index Futures enables investors to constantly and regularly access securities trading in a market which is highly regulated and that too without the need of owning the stock market index that is being covered by the futures contract. Through this investors have the possibility of generating big returns even while investing little money.

Three advantages of investing in Stock Index Futures vs. individual stocks are:

(1): Large amount of money can be made with little capital in case of Stock Index Futures which is not highly likely in case of investing in individual stocks.

(2): Investing in Stock Index Futures allows investors to hedge their equity positions against losses in a more systematic manner.

(3): Investments in Stock Index Futures provides more scope for speculation as well when compared to investment in individual stocks and so speculators can bet on the market’s direction in a more methodical manner.