Reasons to invest
ASX Index Futures provide you with exposure to an index's movement for a limited period of time. You can use futures as part of a strategy integrated with your share investments, or in isolation.
Gain exposure to the broad sharemarket or to a market sector
ASX Index Futures enable you to trade a view on the broad sharemarket, or on a market sector, in one transaction. Instead of trying to construct a portfolio of shares that make up the index, or choosing a stock that you believe will move in line with the broader market, you can take a position using an index futures contract.
Hedge a physical position
You can sell futures to hedge a portfolio of shares. By selling futures, you commit yourself to selling the underlying index at the maturity date of the futures contract.
For example, you may have a broadly-based share portfolio which trades in line with the S&P/ASX200 Index. By selling ASX Mini 200 Futures you can lock in the value of your portfolio for the life of the contract.
It is important to remember that the success of a hedging strategy will depend in part on how closely movements in the value of your portfolio track movements in the index underlying the futures contract. This is often referred to as basis risk.
Trade declining markets
Share investors are used to making money only in rising markets. If your view on the market or on an individual stock turns negative, your choices traditionally have been either to sell your shares or to take no action and wait for the market to recover.
With ASX futures you can profit in falling markets. If you have a bearish view on the market as a whole, you can sell index futures. If the market falls as predicted, you can then take profits by closing out your position, or alternatively maintain your position until maturity of the contract and receive a cash settlement.
Achieve leveraged returns
When you trade a futures contract, your initial outlay is only a small percentage of the value of the contract. If the market moves in your favour, the percentage returns you make from trading the futures contract will be significantly higher than the move in the underlying index.
This makes futures an ideal vehicle for investors who are looking to take on large trading positions for a comparatively low capital commitment. Traders should note, however, that while potential gains are magnified by using leveraged instruments such as futures, so too are potential losses. Using futures to speculate on share price movements involves significant risks, as well as offering the potential for high returns.