How to trade stock futures

Stock index futures are the crystal ball of the financial markets. They're bets on the direction of the equities market that track with key stock market indices. In the United States, stock futures date back to the s with commodities futures when regional farmers convened in Chicago to sell wheat to dealers. That scenario evolved to include trades for future bushels of wheat, livestock, or butter, among other items. Sellers could lock in prices ahead of time, while buyers knew the costs they would eventually be paying. Futures are also known as "derivatives," and are speculative, without any actual delivery of a physical product.

Advantages Of Trading Futures Over Stocks

Futures are derivatives contracts that derive value from a financial asset such as a traditional stock, bond, or stock index, and thus can be used to gain exposure to various financial instruments including stocks, indexes, currencies, and commodities.

Future contracts, because of the way they are structured and traded, have many inherent advantages over trading stocks. The margin is essentially collateral that the investor has to keep with their broker or exchange in case the market moves opposite to the position he has taken and he incurs loses. This may be more than the margin amount, in which case the investor has to pay more to bring the margin to a maintenance level. What trading futures essentially means for the investor is that he can expose himself to a much greater value of stocks than he could when buying the original socks.

Future contracts are traded in huge numbers every day and hence futures are very liquid. The constant presence of buyers and sellers in the future markets ensures market orders can be placed quickly. Also, this entails that the prices do not fluctuate drastically, especially for contracts that are near maturity. Thus, a large position may also be cleared out quite easily without any adverse impact on price.

In addition to being liquid, many futures markets trade beyond traditional market hours. Commissions on future trades are very low and are charged when the position is closed. The total brokerage or commission is usually as low as 0. However, it depends on the level of service provided by the broker. Note that online brokers are increasingly offering free stock and ETF trading across the board, making the transaction cost proposition for futures a bit less attractive than it had been in the past.

An investor with good judgment can make quick money in futures because essentially he is trading with 10 times as much exposure than with normal stocks. Also, prices in the future markets tend to move faster than in the cash or spot markets. A word of caution, however: just as wins can come quicker, futures also magnify the risk of losing money. However, it could be minimized by using stop-loss orders.

Because futures are highly leveraged, margin calls might come sooner for traders with wrong-way bets, making them potentially a more risky instrument than a stock when markets move fast. Futures are very important vehicles for hedging or managing different kinds of risk.

Companies engaged in foreign trade use futures to manage foreign exchange risk , interest rate risk by locking in a interest rate in anticipation of a drop in rates if they have a sizeable investment to make, and price risk to lock in prices of commodities such as oil, crops, and metals that serve as inputs. Futures and derivatives help increase the efficiency of the underlying market because they lower unforeseen costs of purchasing an asset outright.

It is difficult to trade on inside information in future markets. For example, who can predict for certain the next Federal Reserve's policy action, or the weather for that matter? Unlike single stocks that have insiders or corporate managers who can leak information to friends or family to front-run a merger or bankruptcy, futures markets tend to trade market aggregates that do not lend themselves to insider trading.

As a result, futures markets can be more efficient and give average investors a fairer shake. Futures are usually a paper transaction for investors interested solely on speculative profit. This means futures are less cumbersome than holding shares of individual stocks, which need to be kept track of and stored someplace even if only as an electronic record.

Companies need to know who owns their shares in order to pay out dividends and to record shareholder votes. Futures contracts don't need any of that record keeping. One can get short exposure on a stock by selling a futures contract , and it is completely legal and applies to all kinds of futures contracts.

On the contrary, one cannot always short sell all stocks, as there are different regulations in different markets, some prohibiting short selling of stocks altogether. Short selling stocks requires a margin account with a broker, and in order to sell short you must borrow shares from your broker in order to sell what you don't already own. If a stock is hard to borrow, it can be expensive or even impossible to short sell those shares. Futures have great advantages that make them appealing for all kinds of investors—speculative or not.

However, highly-leveraged positions and large contract sizes make the investor vulnerable to huge losses, even for small movements in the market. Thus, one should strategize and do due diligence before trading futures and understand both their advantages as well as their risks.

Stock Trading. Financial Futures Trading. Metals Trading. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Options Trading. Futures Trading. Technical Analysis. Table of Contents Expand. Futures are Highly Leveraged. Future are Very Liquid. Execution Costs are Low. Diversification or Hedging. More Efficient and Fair.

Paper Investments. Short Selling is Easier. The Bottom Line. Key Takeaways Stock investors may have heard the term "futures" or "futures market", but thought to themselves that these esoteric derivatives are not for them. While futures can pose unique risks for investors, there are several benefits to futures over trading straight stocks.

These advantages include greater leverage, lower trading costs, and longer trading hours. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Articles. Commodities How Risky Are Futures? Partner Links. Related Terms How Index Futures Work Index futures are futures contracts where investors can buy or sell a financial index today to be settled at a date in the future. Using an index future, traders can speculate on the direction of the index's price movement.

Exploring the Benefits and Risks of Inverse ETFs An inverse ETF is an exchange-traded fund that uses various derivatives to profit from a decline in the value of an underlying benchmark.

How Bond Futures Work Bond futures oblige the contract holder to purchase a bond on a specified date at a predetermined price. How the Futures Market Works A futures market is an exchange for trading futures contracts. Futures, unlike forwards, are listed on exchanges. Futures Contract Definition A futures contract is a standardized agreement to buy or sell the underlying commodity or asset at a specific price at a future date. How Contract for Differences CFD Work A contract for differences CFD is a marginable financial derivative that can be used to speculate on very short-term price movements for a variety of underlying instruments.

In addition to being liquid, many futures markets trade beyond traditional market hours. Extended trading in stock index futures often runs. Stock futures are contracts that state that you will buy or sell shares of a stock at a certain price on a specific date. Because the sale price is negotiated in.

A futures contract is an agreement to buy or sell an asset at a future date at an agreed-upon price. Futures contracts are standardized agreements that typically trade on an exchange. One party agrees to buy a given quantity of securities or a commodity, and take delivery on a certain date.

Learning how to trade futures could be a profit center for traders and speculators, as well as a way to hedge your portfolio or minimize losses. But, for those who seek a fast-moving trading opportunity, futures trading may be right for you.

View more search results. Find out more. A stock index represents the performance of a group of shares.

How to Trade Dow Jones Index Futures

Futures are derivatives contracts that derive value from a financial asset such as a traditional stock, bond, or stock index, and thus can be used to gain exposure to various financial instruments including stocks, indexes, currencies, and commodities. Future contracts, because of the way they are structured and traded, have many inherent advantages over trading stocks. The margin is essentially collateral that the investor has to keep with their broker or exchange in case the market moves opposite to the position he has taken and he incurs loses. This may be more than the margin amount, in which case the investor has to pay more to bring the margin to a maintenance level. What trading futures essentially means for the investor is that he can expose himself to a much greater value of stocks than he could when buying the original socks. Future contracts are traded in huge numbers every day and hence futures are very liquid.

How do I Trade Stock Futures?

The Dow tracks 30 blue-chip U. Still, Dow index futures are a popular tool for getting broad-based exposure to U. A futures contract is a legally binding agreement between two parties in which they agree to buy or sell an underlying asset at a predetermined price in the future. The buyer assumes the obligation to buy and the seller to sell. And the value of the underlying asset—in this case, the Dow—will usually change in the meantime, creating the opportunity for profits or losses. Some commodity futures contracts still require actual physical delivery of the underlying product in question, such as bushels of corn, but that is not the case with Dow and other financial market futures, which were created to allow traders to easily hedge risk and speculate for profit. They can be settled for cash. Put simply, DJIA futures contracts enable traders and investors to bet on the direction in which they believe the index, representing the broader market, will move.

The U. The best way to understand how stock futures work is to think about them in terms of something tangible.

Stock futures are contracts that state that you will buy or sell shares of a stock at a certain price on a specific date. Because the sale price is negotiated in advance, market fluctuations between the time the contract is created and the date of sale don't have the impact they would for openly-traded stock.

How Stock Futures Work

Trade Single Stock Futures at Euronext for access to direct equity investments with a much lower capital requirement. Hedge your portfolio on a wide range of over European underlyings. The minimum volume thresholds for block trades on French equity options were revised in June, to better meet the needs of end investors. Check out our full list of Large-in-Scale thresholds. Euronext Amsterdam. Ahold Delhaize. Air France-KLM. Akzo Nobel. ASML Holding. ING Groep. Royal Dutch. SBM Offshore. Euronext Brussels.

Ready to get started trading futures? Here are five steps we recommend you take first. Subscribe Now. Futures differ in important ways from stocks, ETFs and other instruments: trading in tick increments, margin levels, and so on. Be sure to understand how futures work. Visit Intro to Futures. Understand the fundamentals behind prices. Watch and learn the markets by using our educational content, news, research and commentary. Before you enter a trade, first develop a plan to guide your decision-making process.