Cash Indices vs Futures: What's the Difference?
Learn the difference between cash indices and index futures, including how each is priced and what factors can cause them to diverge.
- 7 min read
- For beginners
- Educational
- Lección 3 de 6
When trading indices, you'll often encounter two related but distinct instrument types: cash indices and index futures. This guide explains the difference between them.
This is general educational content explaining common instrument structures, not a recommendation for either instrument type.
What Is a Cash Index?
A cash index (sometimes called a spot index) reflects the current, real-time value of the underlying basket of shares that make up the index. Cash index CFDs are commonly used by traders seeking exposure to an index's current price movement, and their price generally tracks the live, calculated value of the index.
What Is an Index Future?
An index future is a contract based on the expected future value of an index at a specified future date (the contract's expiry). Unlike a cash index, a future's price can differ from the current cash index value, reflecting factors such as interest rates, dividends expected before expiry, and time remaining until the contract expires.
Why Cash and Futures Prices Can Diverge
The difference between a cash index price and a corresponding futures price is sometimes referred to as the "basis," and it generally reflects the cost of carrying a position until the future's expiry, including factors like interest rate differentials and expected dividend payments from constituent companies. As a futures contract approaches its expiry date, its price generally converges toward the cash index value.
Rollover and Expiry Considerations
Because index futures have expiry dates, traders using futures need to be aware of contract rollover — the process of closing a position in an expiring contract and potentially opening a new position in the next available contract, if continued exposure is desired. Cash indices, by contrast, do not have an expiry date in the same way, since they continuously reflect the live underlying index value.
Summary
Cash indices reflect the real-time value of an index's underlying shares, while index futures are contracts based on the index's expected future value, which can diverge from the cash price due to factors like interest rates and expected dividends. Understanding this distinction, along with futures-specific concepts like rollover, is important when comparing these two instrument types.
Frequently Asked Questions
Cash index CFDs are commonly used for shorter-term exposure due to their continuous, real-time pricing, though this can depend on individual preferences and the specific instrument offered by a provider.
Risk Warning
Trading forex and CFDs involves significant risk and may not be suitable for all investors. You may lose all of your invested capital. Please ensure you fully understand the risks before trading.
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