Stock Futures

Trading futures necesitates more mathematics and dangers than trading in general. Stock futures are extremely profitable for small investors and provide a way for larger investors to hedge their bets. Futures are loved by institutions and hedge funds, which can utilize a very small portion of an overall portfolio to hedge the gains or losses of the stock market and always come out on top.

Future Really Means Future

Stock futures are traded to represent another security. In most cases, stock futures are traded as indices. The Dow Jones Industrial Average is just one of many different indices which trades as a stock future on the exchange. When you buy stock futures, you are buying the right to buy or sell a certain stock or commodity at some point in the future at a predetermined price. For example, if you think the Dow Jones Industrials Average will be worth 12,000 by the end of the year from 9000, it would make sense to buy a stock future valued at less than 12000. If by the end of the year the index is worth 14,000, you could buy the index at the predetermined price of 12000 and profit an instant 2000 points.

Hedging Your Bets

Many investors use stock futures as a way to hedge their bets against a runaway market in either direction. To do this, investors use stock futures or stock options to dedicate a very small part of the overall investment to buy a stock future. In this case, let's use the example of the Dow Jones. An investor can buy the ETF of the Dow Jones then sell the futures. If the price of the Dow rises, the investor will gain on the ETF but lose on the stock future; if it drops in price, she'll lose on the ETF and make money with the futures. Though this does minimize returns, it also drops the losses to acceptable margins. This strategy is best adapted to markets that are extremely volatile and prone to large movements up and down.

Why Stock Futures?

Investing 101 shows us the power of leverage. Stock futures are highly leveraged investments that can be used to generate returns that are higher than average. Many traders like to use e-minis to trade indices to $5 each point movement. These contracts can be bought and sold for 2.5% to 5% of their true face value due to the overwhelming 20-40:1 margin offered by brokerages. Stock brokers for futures traders are numerous, and many stock brokers that deal in stock offerings offer stock futures alongside more traditional offerings.

More Margin Required

Trading stock futures is highly speculative, and as a result, traders have to put up larger account balances to trade futures than to trade stock. Stock trading is invariably different than future trading, as the trading of futures is trading a contract, not the actual stock itself. For those investors who are accustomed to the paperwork required for option trading, futures trading will seem very familiar.