Stock futures are an agreement to buy or sell a specific quantity of a security at a predetermined price on a future date. The contract is based on the value of a particular stock or stock index.
Futures are primarily for institutional investors, and unlike stock options, the participants in futures contracts are obliged to deliver and receive the underlying asset when the contract expires.
You’ve probably heard of stock futures, but maybe you’re not quite sure what they are or how they work. Don’t worry – you’re not alone. In this beginner’s guide, we’ll explain everything you need to know about stock futures, including what they are, how they work, and whether or not they’re a good investment for you.
What Are Stock Futures?
A stock future is a contract between two parties to buy or sell shares of a particular stock at a predetermined price on a specified date in the future. The contract is standardized so that it can be traded on an exchange. The contract’s price is determined by the value of the underlying stock, with the contract issuer agreeing to pay the difference between the agreed-upon price and the actual price of the shares when the contract expires.
The party who agrees to buy the stock in the future is said to be “long,” while the party who agrees to sell the stock in the future is said to be “short.”
What are futures contracts?
Futures contracts are agreements to buy or sell an underlying asset at a future date at a price that is agreed upon today. Investors often use futures contracts to speculate on the direction of a given asset’s price or to hedge against potential price swings.
What are stock index futures?
A stock index future is a type of stock future based on the value of a particular stock index. A stock index is a collection of stocks chosen to represent the overall performance of a given stock market or sector. Several stock indexes include the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite Index.
How do stock index futures work?
When you buy a stock index future, you agree to buy or sell shares of the underlying stock index at a predetermined price on a specified date. The contract is standardized so that it can be traded on an exchange. The price of the contract is determined by the price of the underlying stock index, with the contract issuer agreeing to pay the difference between the agreed-upon price and the actual price of the shares when the contract expires.
How do stock futures work?
When you buy a stock future, you are essentially betting that the underlying stock’s price will go up. Conversely, when you sell a stock future, you are betting that the underlying stock’s price will go down.
Stock futures are traded on exchanges and have standard contract sizes, tick values, and expiration dates. The most popular stock futures contracts are for shares of large companies such as Apple, Google, and Amazon.
The price of a stock future is not always equal to the price of the underlying share, but it is usually very close. This is because stock futures are “marked to market” daily. This means that if the price of the underlying shares goes up or down, the price of the corresponding futures contract will also go up or down by a similar amount.
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Do futures predict stock market prices?
One common misconception about stock futures is that they can be used to predict where the stock market is headed. While it’s true that they can be used to hedge against downside risk or speculate on future movements in individual stocks or the broader market, it’s important to remember that stock futures are not an accurate predictor of where the stock market is headed in the future.
Do stock futures predict prices for the next day?
There is no clear answer when it comes to whether or not stock futures predict prices for the next day. Some investors believe they can be used as a predictor of future stock prices, while others believe they are only effective at hedging against downside risk. However, there is no definitive evidence that proves either side is correct.
How to buy stock index futures?
To buy a stock index future, you first need to open a futures account with a broker. Once you have an account, you can place an order to buy a contract on the desired stock index. The price of the contract is determined by the price of the underlying stock index, with the contract issuer agreeing to pay the difference between the agreed-upon price and the actual price of the shares when the contract expires.
What are the benefits of trading stock futures?
Stock futures offer several benefits for investors, including:
- The ability to speculate on the direction of a given stock’s price
- The ability to hedge against potential price swings
- The ability to trade on a margin
- The ability to trade 24 hours a day during the workweek
What are the risks of trading stock futures?
The risk associated with trading stock futures include market volatility, liquidity risk, interest rate risk, and counterparty risk. Market volatility refers to the fluctuations in the price of a security or index. Liquidity risk is the risk that a security or index may not be able to be sold at its current price due to a lack of buyers. Interest rate risk is the risk that changes in interest rates will impact the value of a security or index.
Like all investments, there are risks associated with trading stock futures. These risks include:
- The potential for loss
- The potential for volatile prices
- The potential for margin calls
- The potential for slippage
- The potential for counterparty risk
Before trading stock futures, be sure to understand the risks involved and learn about strategies that can help mitigate these risks.
A list of popular stock index futures
S&P 500 Futures
The S&P 500 Futures is a type of stock futures contract based on the value of the S&P 500 Index. The S&P 500 Index is a stock market index that tracks the performance of 500 large, publicly-traded companies. The S&P 500 Futures is traded on the Chicago Mercantile Exchange (CME).
E-mini S&P 500 Futures
An E-mini S&P 500 Future is a type of stock futures contract that is based on the value of the S&P 500 Index. This type of contract is smaller than a regular S&P 500 Futures contract, which makes it easier for new investors to get started. The E-mini S&P 500 Futures is traded on the Chicago Mercantile Exchange (CME).
Dow Jones Industrial Average Futures
The Dow Jones Industrial Average Futures is a type of stock futures contract based on the value of the Dow Jones Industrial Average (DJIA). The DJIA is a stock market index that tracks the performance of 30 large, publicly-traded companies. The Dow Jones Industrial Average Futures is traded on the Chicago Mercantile Exchange (CME).
Nasdaq Composite Index Futures
The Nasdaq Composite Index (COMP) is a stock index that tracks the performance of more than 3,000 large, publicly-owned companies listed on the Nasdaq Stock Exchange. The Nasdaq Composite Index is a stock market index that tracks the performance of over 3,000 companies listed on the Nasdaq Stock Market. The Nasdaq Composite Index Futures is traded on the Chicago Mercantile Exchange (CME).
Nasdaq 100 Futures
The Nasdaq 100 Index (NDX) is a stock index that tracks the performance of 100 large, publicly-owned companies listed on the Nasdaq Stock Exchange. The NDX is often used as a benchmark to measure the overall performance of the US technology sector.
Russell 2000 Futures
The Russell 2000 Index (RUT) is a stock index that tracks the performance of 2,000 small, publicly-owned companies in the United States. The RUT is often used as a benchmark to measure the overall performance of the US stock market.
Are stock futures accurate?
There is no guarantee that stock futures will be accurate, as they are based on predictions and not guaranteed to reflect actual future performance. However, many institutional investors find them to be useful tools for planning and decision-making purposes.
Are futures the same as stocks?
No, futures are not the same as stocks. A stock is a share of ownership in a company, while a futures contract is an agreement to buy or sell a particular stock at a predetermined price on a specified date in the future.
Where are stock futures traded?
Stock futures are traded on exchanges such as the Chicago Mercantile Exchange (CME) and are used by institutional investors to speculate on the future direction of the stock market. Hedgers can also use them to protect against downside risk in the stock market. For example, if you owned shares of ABC Company and were worried about a drop in the stock price, you could buy a put option on ABC Company’s stock. If the stock price did indeed drop, you would offset some of your losses with the gains from your put option.
How are futures different from stock options?
With stock options, an investor is given the right, but not the obligation, to buy or sell a particular security at a set price on or before a certain date. On the other hand, futures contracts are an obligation to buy or sell a specific quantity of a security at a predetermined price on a future date. This makes futures contracts riskier than stock options.
How Are Stock Futures Calculated?
Stock futures prices are determined by supply and demand in the marketplace. When more people want to buy a particular futures contract than sell it, the price goes up. When more people want to sell a particular contract than buy it, the price goes down.
The most important factor in determining the price of stock futures is often said to be the”fundamental value” of those shares in those days ahead—but many other factors can also affect those trading values, including trader psychology and changes in the political landscape.
What is the formula to calculate stock index futures?
The formula to calculate stock index futures is:
F = S x (P – PE) / (Q x V)
Where:
F = Futures price
S = Spot price
P = Price of the underlying asset
PE = price of the underlying asset at expiration
Q = Quantity of the underlying asset
V = Value of the contract
What is the relationship between stock index futures and stock prices?
Stock index futures and stock prices are both determined by supply and demand in the marketplace. However, stock index futures are also affected by the “fundamental value” of the underlying shares. This means that stock index futures can be used to predict future movements in the stock market, while stock prices are only affected by current supply and demand .
Sometimes those prices might seem irrational, but they almost always follow suit with what is happening in the marketplace as a whole on a given day.
When do stock futures open?
Stock futures traded on CME Globex typically open at 6:00 p.m. EST Sunday and close at Friday 5:00 p.m. EST, with a daily settlement period break from 5:00 p.m. to 6:00 p.m.
There are some exceptions. For example, options on stock index futures typically have longer trading hours than regular stock futures.
Stock futures traded on CME ClearPort typically open at 6:00 p.m. EST Sunday and close at Friday 6:45 p.m. EST, with a daily settlement period break from 6:45 p.m. to 7:00 p.m. EST Monday to Thursday.
Check the CME Group website for opening and closing times S&P Mini contract details
When do stock futures open on Sunday?
Stock futures traded on CME Globex and CME ClearPort typically open at 6:00 p.m. EST Sunday.
What time do stock futures open?
Stock index futures contract opens daily from Sunday to Friday at 6 p.m. EST or 5 p.m. CT.
How do I see stock futures?
To view stock futures, you can visit the CME Group website. Once on the website, you can select “Products and Services” from the toolbar at the top of the screen and then select “Futures.” This will take you to a page where you can view all the stock futures contracts traded on CME Globex.
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Conclusion
Stock futures are a type of financial contract that allows investors to speculate on future movements in individual stocks or broader markets.
Hedgers can also use them to protect against downside risk in these markets.
Despite their usefulness, it’s important to remember that stock futures should not be used as an accurate predictor of where markets are headed in the future due largely due to their complex calculation process, which factors in many elements beyond just pure market data analysis.
