If you’re interested in getting into futures trading, there are several important things to consider beforehand. While futures trading can essentially be a long-term commodity investment, it’s also possible to actively trade stock futures. Here are five things you need to know about stock futures when you first start out.
What Are Stock Futures?
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Stock futures or futures contracts are a type of financial contract between buyers and sellers where each party agrees to buy or sell a stock at a set price on a predetermined date in the future. The future date, known as the expiration date, is when the seller of the stock asset is obligated to sell and the buyer is obligated to purchase the futures contract. Stock futures enable traders to purchase stocks at lower prices and sell them at higher prices.
What Is Futures Hedging?
Futures hedging is buying or selling futures contracts to protect against risks of loss because of a change in the prices within the cash market. Essentially, futures hedging allows traders to lock in the price of a specific commodity immediately, even if the underlying asset won’t be bought or sold until a future date. There are two types of futures hedging: long and short positions. In long hedging positions, traders agree to purchase a commodity at some point in the future. In short hedging positions, traders sell the futures contract itself to protect against changing prices in the market.
What Is Futures Speculation?
Stock futures speculation enables traders to speculate on the movements of the prices of certain commodities. So if a trader purchases a futures contract and the price of that underlying asset rises above the original price at its expiration, this means the trader earns a profit. Similarly, if traders speculate on a downward movement trend on the commodity’s price in the future, they can exit the contract before any real loss.
How Investors Trade Stock Futures
Essentially, traders who buy and sell stock futures have to put down an initial margin payment to purchase the stock. This margin is just a fraction of the total price of the commodity and is usually 10% of the value of the futures contract. This margin is a form of collateral for the investor to keep with their stockbroker or exchange in the event that the market moves in a way that results in a loss for investors.
Pros and Cons of Futures Trading
Stock futures have many benefits for investors. Firstly, they’re easy to liquidate, which means you can actively trade in futures contracts to make a profit. Secondly, there is less risk associated with futures contracts, since the prices are locked in during the initial transactions. One drawback to futures trading, though, is that there can be a reduction in the final asset value close to the expiration date. This is why many traders who buy and sell stock futures do so on an active trading basis.
If you’re interested in trading in the futures markets, there are many more benefits to doing so. You can also find many resources and tools through online trading platforms that will continue to help you learn and deepen your understanding of trading in stock futures.