What Are Stock Futures?
Let’s talk about stock futures. U.S. futures got their start as a trading commodity in the mid-1800s. At the time, farmers were still transporting crops into cities on the hopes of finding a buyer at agreeable prices. But prices fluctuated frequently, and often wildly, based on factors such as the season, type of produce, and current supply and demand in the region.
Eventually, futures cropped up as a way to mitigate some uncertainty in the process. These were fairly simple contracts that stipulated an exchange of goods for a set price at a predetermined date.
But these contracts could also be traded and borrowed. For instance, one restaurant could buy a futures contract for apples from another, or sell their contract in the hopes of repurchasing it later at a lower price.
This beget the thriving derivates market we have today, where futures contracts are bought and sold for all manner of commodities, currencies, stocks, and even market indices.
What are futures?
Futures are derivative financial contracts that require action from both the buyer and seller at a future date. The buyer will be required to buy an asset at a set date and price, while the seller must sell the asset at a set date and price. (Futures differ from options, which give investors the right but not the obligation to purchase assets.)
Futures contracts detail specifics such as the quantity and price of the underlying asset, as well as the expiration date. Having standardized conditions allows these contracts to be traded on regulated futures exchanges. This contract must be fulfilled regardless of the current market price or conditions upon expiration.
Futures are called derivates because they derive their price from the underlying asset. In ye olden times, these assets were physical commodities such as crops, natural gas, and crude oil. Today, the derivates market has expanded to include assets like:
- Stocks and stock indices, most famously the S&P 500 Index
- Currencies, such as the U.S. dollar, British pound, and euro
- Precious metals like gold and silver
- U.S. Treasury bonds and other products
Futures are also considered a leveraged financial instrument, as an investor or institution only has to lay down a portion of the contract’s cost in order to trade. This relays potential for outsized gains for the investor — as well as tremendous (even unlimited) losses.
As such, futures trading is an advanced instrument best suited for experienced investors and institutions.
What are stock futures?
Stock futures are futures contracts that focus specifically on stocks or the stock market. Individual investors use these contracts to profit on price swings, while institutional investors often use them to hedge against risk.
Stock futures often use high leverage, which means that traders don’t front 100% of the contract value when they enter the trade. Instead, the broker will require an initial margin amount, or a fraction of the total contract value. This amount varies based on:
- The broker’s terms and conditions
- Contract size
- The creditworthiness of the investor
Stock futures are popular not just for their outsized return potential, but for the near 24/7 market that allows for moment-by-moment profit-taking. Unlike the stock market, stock futures trading begins at 6pm on Sundays, and remains open until 5pm on Fridays. Trading halts for a 30–60-minute window at the end of each business day.
There are also different types of stock futures:
- Single stock futures — Futures contracts where the buyer, who takes the “long” position, promises to pay a specified price for 100 shares of a single stock on the predetermined delivery date
- Stock market futures (equity index futures or market futures) — Contracts that track a specific benchmark index and often settle for cash or get rolled over
Why should you focus on futures?
Even if you don’t invest in futures, they can be a valuable source of information. For example, futures provide everyday investors with a gauge of how professional traders and institutional investors perceive the health of:
- A particular stock
- The underlying index
- The stock market at large
- A particular commodity
- Or even the broader economy
Additionally, futures are a means for investors to express their ideas of where the market will (or won’t) move. In other words, investors can use futures to lock in their expectations of future performance — regardless of what actually happens.
And because futures contracts trade overnight during the week, the morning “market futures fair value” report on many early-morning business channels tells everyday investors what market futures contracts should be priced at in the coming hours based on the current cash value of the underlying index.
This can provide investors with data about why stocks moved in after- and pre-markets, where larger players expect the market to move, and which securities, sectors, and industries they think is worth investing in (or avoiding) during the coming hours.
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Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC (“Quantalytics”). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC (“QAI”), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai’s investment advisory services.