The Relationship Between Futures and Actual Markets

Have you ever wondered how analysts and reporters determine if the market is going to open higher or lower than it closed yesterday? You know how it goes. You wake up in the morning, pull up your favorite stock investing Web site and see a headline stating “Markets Heading for Lower Opening Today.” But how do they know? What are these analysts looking at that tells them the market is heading for a lower opening today?

Investors often use the futures market to predict whether the sharemarket will open higher or lower on a daily basis. This can be achieved in several ways including reviewing offshore futures contracts, in markets like Europe and the United States to see how particular stock indices, including the FTSE and the S&P500 traded overnight. USA future markets are normally used as the lead.

In most cases, if the futures market is up or down in these major markets, investors expect this to impact on our market. Hence the old adage of “If America sneezes, Australia catches a cold”. However, investors should be aware that this is a rough guide only. There are many other different factors that may impact the price action of equities and the broader equity market on that day.

In Australia we are also able to trade the SFE SPI200 (SPI), which plays an important role in allowing investors and traders to gain exposure in relation to the Australian equities market. It’s important to note that futures are derivatives and as such their value is derived from something else. For example, futures such as the SPI derive their value from the S&P/ASX200 – so essentially share prices.

Future market continue to operate after main markets are closed, hence giving a hint as to the likely direction of the main market upon opening.

Click here to check futures market indices.

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