E-mini S&P 500 is the name that refers to a type of futures contract that is traded on the Chicago Mercantile Exchange (CME). It goes by the name E-mini because it is a representation of all stocks traded on the S&P 500. The E-mini S&P 500 contract is a useful tool that allows those without significant investment funds to participate in the market and do a dynamic type of trading known as day trading.
How it Works
The S&P 500 refers to an index of 500 large capitalization common stocks traded within the United States. This group of S&P 500 stocks is a combination of shares traded on both the NASDAQ and New York Stock Exchange which are the largest stock exchanges in the nation. The E-mini S&P 500 futures contract is used in what is known as day trading. Day trading does not use the S&P 500 index but rather the E-mini futures contract.
With S&P 500 E-mini futures contracts, a person can trade all of stocks grouped together on the S&P 500. In other words, the contract you buy represents all of the stocks on the major exchanges such as the Dow Jones Industrial, NASDAQ, and S&P 500. In effect, it is like trading on the S&P 500 index itself.
The Benefits
The benefits of using a futures contract for day trading are several. To begin with, it is much easier to buy and sell as compared to assembling a trade with S&P 500 stocks. One of the significant benefits is that you have a tool by which you can short the market much easier. Shorting the market is a method by which the buyer of a contract expects the price of a stock to decline. Because it is easier to sell a contract and buy it back later in the day, the investor has a greater potential of making a profit on the margin between short sale stocks and what needs to be covered.
Day trading with the E-mini S&P 500 is much cheaper than trading with individual stocks on the major exchanges. Depending on the broker, you usually only have to deposit enough to cover the margin. For example, to get started, a day trader might have to only deposit between $1,500 and $2,000 whereas someone trading stocks on the big markets might have to put up thousands of dollars.
An Example
The total price of an E-mini S&P 500 future can be computed by multiplying $50 times the index price of the contract. However, you make your profit by the change in the index price from the time you buy until the time you sell. In other words, if a contract is bought at an index price of 2105 and is later sold at 2107, the buyer will earn a profit of 2 points times $50 or $100. Take away any commissions and the rest is yours.
How to Get Started
To get started with S&P 500 E-mini futures trading, a prospective trader needs to open an account with a broker specializing in this type of futures trading. Beginners can also enroll in any one of a number of S&P 500 E-mini futures day trading courses that are offered from a variety of vendors. The advantage of taking a course is that the instructor can show you how to develop a strategy for your day trading so that you make the most informed decisions possible.