Education · Stage 1 · 02
The index futures, and what is inside them
An index is not a market. It is a number, recalculated continuously from the price of a basket of shares. The future is a market on that number — and the difference between those two sentences explains most of what looks strange at the open.
Mak · 4 min read · Stage 1, article 2 of 13
The index is a measurement
Somebody chooses a list of companies and a rule for combining their prices into one figure. That figure is the index. Nobody trades it, nobody holds it, and it does not exist anywhere except as the output of that calculation.
The Nasdaq-100 is the hundred largest non-financial companies listed on the Nasdaq exchange, weighted by size. The S&P 500 is a broader list, chosen by a committee. The Dow is thirty companies weighted by share price rather than by size, which is an accident of history and makes it the odd one out.
Weighted by size means dominated by a few
«One hundred companies» sounds diversified. It is not, and this is the single most useful thing to know about the instrument.
Because the weighting follows company size, the biggest names carry most of the index and the smallest ones barely move it at all. The largest handful commonly account for something close to half of the whole thing. The exact figures change every quarter and the list is rebuilt once a year, so no number here would stay true — but the shape does.
The four you will hear about
Four index futures carry nearly all the retail volume in the United States. They are not interchangeable: they measure different things and move different amounts of money per point.
| Symbol | Index | One point | Micro version |
|---|---|---|---|
NQ | Nasdaq-100 — 100 large non-financial names | $20 | MNQ — $2 |
ES | S&P 500 — broad US large cap | $50 | MES — $5 |
YM | Dow 30 — price weighted, thirty names | $5 | MYM — $0.50 |
RTY | Russell 2000 — US small cap | $50 | M2K — $5 |
«One point» is not a measure of how risky each one is. A point of the Dow and a point of the Nasdaq-100 are not comparable units, because the two indices sit at different numbers and move by different amounts. What that column actually tells you is how much money one unit of movement produces, and article 9 in this stage turns it into something you can plan with.
The future is not the index
They track each other closely, and they are not the same thing. Three differences matter from the first day.
- Different opening hours
- The shares trade for about six and a half hours. The future trades for roughly twenty-three. Overnight, the index is a frozen number left over from the close while the future keeps moving — which is where gaps come from.
- Different price
- The future usually trades a little away from the index, and the gap narrows as expiry approaches. It is not an error and not an opportunity: it is the cost of holding the exposure until then.
The third difference is the one people notice last: the future has its own order book. Its price is produced by buyers and sellers crossing a spread in that book, not by copying the index. When the two disagree, it is because somebody is willing to pay for the disagreement.
What this buys you
Three habits, and they cost nothing to acquire.
- You stop being surprised that an «index» reacts to one company's results.
- You stop comparing points between instruments as if they were the same unit.
- You start reading the overnight session as information rather than noise.
The next article is the narrow version of the same question: out of these four, why this one.