Whats the purpose of S&P 500 futures?

Question

If the S&P 500 is at a level of 2500 then the market value of a futures contract is 2,500 x $250 or $625000. So whats the point of buying a contract if as of December 12/18/2019 the total share value of the S&P 500 is $52434.7. It seems that the buyer of the contract would lose money if the other party would be obligated to deliver all of the shares once the contract expires? Am I understating this right?

Answer 1

I think you have confused the cost of buying one share of each stcok the the value of the index. The index is the value of a portfolio which is weighted by Market Capitalization. The 10 largest companies account for more than 20% of the portfolio. If you had spent 250*2500 to buy all of the components in amounts equal to their Market cap weights, and the Future would move lock step with that index. When the future settles on the 3rd friday of the last month of each quarter, they calculate the settlement price at the opening price of each component stock. The actual stocks are not delivered. If You bought the Future at, say, 2500 and it settles at 3,000 your account would be credited by 500*250 = 112,500 which is exaclty how much the cash portfolio would have appreciated.