QbitsBlogGlossary




QBITS

What Are Stock 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, explained

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 only 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
  • Cryptocurrencies

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 it 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 

What this means for you

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.






Related Qbits

Learn everything about Q.ai Investment Kits and how they help build wealth





Level up your investment game


In just 2 minutes, iQ will help you become the expert your friends go to for investing advice.

Level Up your Investment Game
Tryq Logo

PRODUCT

Learn

Blog

Support

FOLLOW US ON



Q.ai is the trade name of Quantalytics Holdings, LLC Quantalytics. Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC (“QAI”), a SEC registered investment advisor. QIA’s Investment advisory services will be 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 parent company of ForbesMedia LLC, Forbes Global Media Holdings Inc. ("Forbes") has a material ownership interest in Quantalytics. Forbes does not give representation nor warranty with respect to the accuracy or completeness of the content on this website. The content on this website is for informational purposes only and does not constitute a comprehensive description of Q.ai`s investment advisory services. By using this website, you understand the information being presented is provided for informational purposes only and agree to our Terms of Use and Privacy Policy. QAI relies on information from various sources believed to be reliable, including clients and third parties, but cannot guarantee the accuracy and completeness of that information. Nothing in this communication should be construed as an offer, recommendation, or solicitation to buy or sell any security. No representation or warranty can be given with respect to the accuracy or completeness of the information, and is subject to updating, revision, and amendment. Additionally, QAI or its affiliates do not provide tax advice and investors are encouraged to consult with their personal tax advisors. All investing involves risk, including the possible loss of money you invest. Past performance doesn’t guarantee future performance. © 2023 Quantalytics Holdings, LLC. All Rights Reserved.

Copyright © 2023 Q.AI LLC. All rights reserved

We use cookies to provide you with the best experience and show you relevant advertising. Learn more.