You can watch the video and/or review the article below.
Mini equity index futures – before you go consider going “mini”, you need to understand the underlying instrument and what it’s made of. I’ve been a cheerleader for the E-mini S&P 500 futures over 25 years, and I still am! And now it’s time for you to meet its mama.
Facts on Futures Series: Part 3
Whether you’re brand new or been trading them for awhile, I want to make sure you know the key facts about futures. Before we head to mini equity index futures, What is the S&P 500?
Broad-Based…
The S&P 500 is a broad-based market capitalization weighted index. So there’s a few big words in there, let’s break them down.
Broad-based means all kinds of businesses, all kinds of sectors. It’s not just technology like the NASDAQ, it’s not just small cap like the Russell. It’s pretty broad on who gets to be in the S&P 500.
And the “S” and “P” here stand for Standard and Poors, the organization that decides who is in the S&P 500 at any given time. Yes, you can get kicked out and you can get brought in!
….Market Capitalization…
Market capitalization simply means the size of that company. So let’s just take Apple or Tesla or Nvidia because they’re huge companies that we’ve heard of. They have big market capitalization because it’s simply the formula of the share price multiplied by the number of shares outstanding. That’s the size of the company in its dollar value.
…Weighted…
Weighted means that there are different importance levels given to stocks in the S&P, they’re not all treated equally. For example I mentioned Apple, Inc. which has a much larger weight than some other stocks in the S&P. The way that the S&P 500 prices is not representing all stocks equally, but that’s not a bad thing, it’s just a factor to know. The bigger the market cap, the more the weight of the price of that stock on the S&P 500 index movement, so like I mentioned with Apple.
All Together Now: Broad-Based Market Capitalization-
Weighted Index
The S&P 500 tracks about 500 of the largest US companies in leading Industries. It is the key indicator of the health of the US market. So if you are trading at all you want to be aware of what’s going in the US because our economy is leading. In the US the stock market is probably the market that performs the best. And the S&P 500 will tell you in the most distinct way what’s going on in the US stock market, not just of those 500 stocks but of all the stocks together.
So it doesn’t matter if you don’t trade futures directly or the S&P directly, you need to know what it’s doing.
Because here’s the thing: Wall Street looks at the S&P 500, but Main Street generally looks at the Dow Jones Industrial Average. And I’ve tested this out!
I remember back when I was working in Manhattan at a research firm on Wall Street, and my mom was driving me when I was still living at home to save money an apartment and she was driving me to the train station.
I just randomly asked her “Mom what’s the stock market?”
And her answer was “I don’t know, the Dow?”
That’s the first and only thing she knew of. My mom is a wonderful intelligent woman but she is not well-versed in financials. So that’s why I say that Main Street looks at the Dow but professionals look at the S&P.
Now that we’ve gotten clear on what the S&P 500 actually is, I’ll get to how mini index futures work next, stay tuned!
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