How Does The NASDAQ Future Index Work?

The NASDAQ Future Index is the first electronic stock market, which uses computers and telecommunications to trade shares rather than a traditional trading floor. It is the fastest growing major stock market in the world with well over 5,000 companies listed.

Market makers compete to buy and sell listed stocks of companies via a worldwide computer network for large and small investors. As mentioned on other pages of this site, it is an OTC market.

The NASDAQ Future Index is not limited to one central trading location. Trading is executed through NASDAQ's computer and telecoms network, which transmits real time quotes and trade data to more than 1 million users in 83 countries.

Without size limitations or geographical boundaries, an open architecture market structure allows a virtually unlimited number of participants to trade in a company's stock.

NASDAQ lists the securities of around 4,000 of the world's leading companies and each year, continues to help hundreds of companies successfully make the transition to public ownership.

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Trading on the NASDAQ future index is not limited to any fixed number of participants. This allows a large number of firms with widely differing business models and trading technologies to connect to the NASDAQ Future Index network and compete on an equal basis.

Rather than forcing investors to go through a single financial firm to buy or sell stocks, the NASDAQ Future Index links up a variety of competitors and lets participants choose with whom they are going to trade.

What is a future?

A futures contract is legally binding and sets the terms for the delivery of something at a specific date in the future. In this case, the delivery is for either company stock or a financial instrument based on an index. However, futures often relate to commodities - things like oil, gas, gold, lumber, pork and foreign exchange.

The traditional use of a futures contract is to hedge the risks in either holding or producing an asset. For an airline, they have a very large requirement for jet fuel and if the price of it changes substantially their business might suffer so they may want to offset some of that risk. In the financial world, a fund manager may wish to balance the risks involved in owning a security or index. A future enables the fund manager to buy short or medium term protection against that risk.

The less traditional - but very significant - use of futures contracts is for speculation. In the world of the trader, a futures contract offers immediate price exposure to an asset or commodity. The trader can bet that prices will rise or fall and make profits or losses as appropriate. The use of futures is leveraged - meaning that there is a lot of borrowed money involved - and so a trader has access to a large amount of an asset for a very small deposit. Needless to say, this can be a very high risk trade.

To learn more about the workings of the NASDAQ, please visit the following links:

What Is The NASDAQ And How Does It Work?

NASDAQ Information Including The QQQQ Tracker