I’ve been thinking about a question lately: why do so many people only buy stocks, yet so few people truly get involved with global index futures? The answer is actually quite simple—most people just don’t know what index futures can be used for.

Let’s start with the most basic concept. An index itself is something you can’t see or touch, and you can’t trade it directly. Global index futures are made to solve that problem. They track the performance of major benchmarks across different countries—for example, the Dow Jones, the S&P 500, and the Nasdaq 100 in the U.S.; the DAX and the FTSE 100 in Europe; and the Nikkei 225 and the Hang Seng Index in Asia, and more. In other words, you’re essentially betting on the rise and fall of the entire market using futures contracts, rather than trading a single stock.

Here’s a key distinction you need to be clear about. When index futures expire, they can only be settled in cash. Unlike gold or crude oil futures, they don’t allow physical delivery. In the beginning, this was a tool used by institutions for hedging, but nowadays retail traders also handle it pretty skillfully. Its use cases aren’t limited to hedging anymore—it can also be used for speculation and arbitrage.

When it comes to trading global index futures, there’s a pitfall you should watch out for. The same index listed on different exchanges has completely different rules. For example, the margin for Nasdaq futures traded on CME starts from 1,738 dollars, but on the Taiwan Futures Exchange it’s 50,000 TWD. Trading hours, transaction fees, and bid-ask spreads will all change accordingly. This is also why many people would rather open an account with overseas futures brokers—even though exchanging currencies is a hassle, the liquidity is much higher and the spreads are smaller.

Leverage is the most critical thing in all futures trading. Taking the Taiwan stock index futures as an example: you only need 184,000 TWD to control a contract value of 3.4 million TWD, which is equivalent to 18.4x leverage. It sounds great, but in reality, an index move with an amplitude of less than 2% can put you at risk of forced liquidation. So many people are right about the direction, yet still get pushed out by small fluctuations—this is exactly why I keep emphasizing the importance of placing an appropriate margin.

When it comes to investment approaches, I think there are three paths you can choose from. First, open a futures account with a securities firm in Taiwan. It’s convenient and fast, but the bid-ask spread is larger. Second, go with an overseas futures broker. Liquidity is better, but you’ll have to keep exchanging currencies. Third, use Contracts for Difference (CFD). This is relatively the most flexible option: there’s no expiration date restriction, trading is standardized in USD, there’s no requirement for physical delivery, and the minimum trading unit can be very small.

As for the practical applications of global index futures, I commonly see four types of strategies. Hedging risk is the most classic one—when institutions hold too much and can’t exit quickly, they short index futures to protect themselves. Speculation is about spotting the trend you expect and using leverage to amplify returns; compared with stock margin trading, which is only 2.5x leverage, futures can often be in the teens to twenties times. Arbitrage trading involves capturing the price difference between futures and spot, or between near-month futures and next-month futures. And then there are hedging trades—such as a Taiwan business quoting in USD but with costs in TWD, where futures can be used to hedge foreign exchange rate risk.

Finally, let’s talk about the fundamental difference between index futures and stock trading. Buying stocks is one hand paying and the other handing over—one step after another. But with futures, you’re buying a contract for the future. Stocks require actual ownership, while futures only require paying the price difference. Stocks can be held long-term, while futures—because of leverage and an expiration date—are more suitable for short-term trading.

To be honest, global index futures themselves aren’t good or bad. Tools are always neutral; the key is how you use them. Risk doesn’t come from the tool—it comes from the user’s discipline. If you want to participate in global market volatility but don’t want to buy individual stocks, global index futures are indeed a good choice. The prerequisite is that you truly understand the rules, strictly control your risk, and can stay in the market for the long run.