How do Dow and S&P 500 just change over night or with negative news? Who manipulates the prices?
In: Economics
Index futures are a way to bet on the future of the whole market without having to hold the whole market. You can bet on the outcome at a 250:1 leverage ratio with a standard S&P contract.
Aside from highly geared standalone bets, people also use them to hedge other risks- one strategy might short a foreign index to hedge against region-specific market risks to a globally diversified portfolio.
The future itself is based on a contract on delivery of financial assets at a specified date— just like it was for sugar or crude oil — but isn’t necessarily a representation of the daily or future price of those assets. The price of the derivative is just a reflection of the current market for that derivative. Which is a roundabout way of saying, very generally: if more people want to buy than want to sell, the price of the index future will go up.
Add in the fact that most trading volume is done by machine, and we can infer that the price of index futures will move around overnight based on anything either human traders *or* algorithmic traders decide will impact the market outlook for the following day. It’s mostly noise, just like any other daily asset price motion.
The price of a stock is based on how much money the company will pay in dividends to its investors which is based on how much money they make. If you are able to make 5% on average on your portfolio and you expect a company to pay out or reinvest $5 a share each year then you do not want to pay more then $100 per share in that company as you have better places to invest them which makes more money. It is more complex then that with spreading the risk by finding inverse correlating investments and such but this is the gist of it. If there is some sort of news, maybe even seamingly unrelated, that means you only expect the company to make $4 per share instead of $5 then you drop the price you are willing to trade the stock from $100 to $80. These types of evaluations happens both on a second to second basis though automated systems, minute by minute by traders making snap judgements and over the course of hours and days by analysists going deep into the data.
The reason for an entire market index to change is news which affects a large portion of the market. In the example of a global virus threat decreasing the value of the S&P 500 it is both because several companies in the index is in the travel industry or sells to the travel industry and because most companies are dependent on a workforce and consumers which might suffer from disease soon.
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