Stock index futures can be eye-openers

Q: What are stock index futures, and are they a good crystal ball into how stocks will behave when the trading day starts?

A: Traders don’t operate in the dark when the trading day starts. Investors have a pretty good inkling of what will happen when the market opens. The reason? The stock index futures market. What are stock index futures? First, a quick definition of futures. Futures are contracts that require traders to buy or sell assets at a set price at a set date in the future. Futures especially caught on in agriculture by allowing farmers and other food producers to lock in the prices they would get for crops even before harvest time.

Futures contracts allow investors to “hedge,” or protect themselves, in case of big moves in prices of an asset in the future.

There are futures contracts that allow investors to hedge changes in prices of all sorts of things ranging from hog bellies to oil and even the weather. But there’s also a separate class of futures known as stock index futures.

These are contracts that obligate traders to buy or sell stocks in the future. They’re based on traders’ anticipation of what trading will look like in the future of major market indexes, such as the Dow Jones industrial average and Standard & Poor’s 500, for instance. There are also stock index futures based on major indexes for other markets around the world.

Due to the large size of the stock index futures market, it can give a pretty reliable indication of what traders are expecting the market to do when it opens. The regular trading session often takes a cue in the morning from action in the futures market.

Don’t make the mistake, though, of reading too much into the futures market and what it means to stocks. The stock index future price is the market’s consensus on how the market will open. Sometimes it’s dead on with the actual market open, but other times it’s not. Also, keep in mind that much can happen from minute to minute, and stocks can swing dramatically by the time the market closes.

If you’re interested in monitoring stock index futures on major U.S. indexes, it’s very easy using USATODAY.com. On the front page of USATODAY.com’s Money section, you’ll find an update on all the major U.S. stock market futures markets until the markets open for regular trading.