What are index futures?

Futures contracts started as a way farmers could sell their crops in advance of harvest to lock in a good price or to raise funds a few months before the crop was ready for market. The index futures we trade are traded on the same exchanges where agricultural commodity futures are still traded. The Chicago Mercantile exchange defines index futures as "legally binding agreements to buy or sell the cash value of the underlying Index at a specific future date." That's a big help, right? Let me see if I can do any better with some bulleted facts which should answer most questions:

• Index futures are a financial instrument called a "futures contract" with a value based on whatever stock index they represent. Today there is no paper contract, just a book keeping entry, but the term contract is still used.
• The cash value of an index futures contract is based on the underlying stock index multiplied by a fixed number plus a premium which represents the income that the same money would have earned if invested elsewhere.
• The value of the index futures contract fluctuates continuously throughout the day as the underlying stock index changes. The values of the stock indexes are recalculated every second.
• Index futures are traded on an exchange. Today this often means an electronic exchange with no actual trading floor.
• The steps in a futures index transaction normally include transmitting an order to a broker, from the broker to the exhange, matching each buy order with a sell order, trasmitting confirmation of trade time and price back from the exchange to the broker and from the broker to the trader.
• Index futures orders can be placed by phone or fax, but most orders today are placed from a PC connected to the internet.
• A transaction in the more heavily traded index futures on an electronic exchange typically takes 2-10 seconds, including all the steps from origination to confirmation.
• Unlike commodity futures, there is no physical product, so never a phone call like, "Where do you want this 5,000 bushels of beans?" The only thing that changes hands are bookeeping entries on an account statement.
• Index futures can be bought or sold (or sold short) by anyone who has an account with a futures broker.
• The trader doesn't know the other party involved in the transaction, only that the transaction was completed.