When discussing futures contracts in the stock futures investing, the obvious assets that come to mind are commodities such as energies, financials, and so on. They are, however, derivatives, and it is not unexpected that there are also stock market futures contracts for worldwide stocks.

Furthermore, you can trade stock futures as a viable alternative for commodities while still having exposure to the equity markets, with the added benefit of having some specific qualities that are ideally suited for risk hedging.

In this post, we will define stock market futures investing and discuss the Pros and Cons of Stock Index Futures Trading.

What Are Stock Market Futures?

Stock market futures, as the name implies, are futures contracts that track the underlying asset, which in this case is equities. Stock futures investing are a type of financial derivative that provides delta exposure to the fluctuations of the underlying asset, which is typically stocks. And delta exposure is used to calculate a portfolio’s price sensitivity to changes in the underlying securities.

In a nutshell. stock market futures investing are essentially an agreement between two parties, a buyer and a seller of the stock, in which the buyer undertakes to pay the stated price on a defined day and the seller is bound to deliver the stock on the same predetermined date. As a result, if you wish to sell a stock futures contract, you don’t need to buy shares first because most of them are cash-settled, which means there is no physical delivery of the stocks.

Although this may appear to be comparable to trading traditional stocks, stock futures differ in that they are standardized, which means that each contract can control a fixed quantity or number of shares.

Difference Between Sock Futures And Options

Stock market futures investing are legally binding obligations, which means you must honor the contract by a specified date or settle it with the trader in another way, such as cash settlement, while paying the trader the difference between the asset’s current price and the price you promised to pay for it. This works well when you acquire assets from a trader and sell them back at a loss, and the advantage is that you don’t have to take control of the assets.

In the case of options, you do not need to make the deal because you are paying a premium for the right to buy or sell the assets at a later period and at a specified price. Furthermore, if the value of the assets linked to your option falls below the price at which you are permitted to purchase them, you are free to cancel the trade and lose just the premium you paid for the right to buy.

Advantages of Stock Futures Investing

You can do stock market futures investing if you just want to profit from the underlying market’s price volatility, but there are many additional advantages.

1. Lesser funds required

When you have limited finances to invest or don’t want to put up as much capital, a futures contract can be a smart option because stock investing futures are leveraged and require only a tiny fraction of the amount you wish to trade. This can free up the balance of your capital for other investments, as if you used that money to buy stocks instead, all of your money would be locked up in a single investment.

For example, if you wish to invest $20,000 in the S&P 500 index, you must put up the entire value of the investment. However, if you buy S&P 500 futures, you may just need to put up $2,000 or as little as $1,000.

2. Leverage has a greater impact on futures

Leverage is one of the most important aspects influencing stock futures investing since it makes futures investing more profitable than stock investing. Because stock futures demand only 5% to 10% collateral, your returns can be considerably increased.

However, leverage works both ways, since if your position swings against you, you might lose far more than if you were buying a stock. In other words, you could lose more money than you put into the stock futures contract.

Due to the daily marking of stock investing futures positions by the market, the amount of gain or loss is credited to or debited from your account. If you don’t have enough collateral in your account to cover losses, you may also receive a margin call, which will require you to deposit more money to balance your account.

3. More liquidity

Stock futures markets are exceptionally liquid because trades are done almost instantly, and futures markets are almost always open since stock futures trade six days a week, every day except Saturday, and are only closed for one hour per trading day.

When compared to futures traders, stock traders are left in the cold if market news is released after the stock market closes, as traders must wait until the following morning to act. Futures traders, on the other hand, can act almost promptly in most circumstances, which is one of the key benefits of stock futures investing.

4. Rapid Returns

Because of the leverage and liquidity aspects, the futures market allows for faster returns, as a futures trader can easily make 10% in a single day, and the gains can be taken at virtually any moment.

5. Easier to short-sell stocks

To short-sell a stock or hedge a position, you must borrow shares from your broker and sell them on the open market, which is known as short-selling.

However, one disadvantage of short-selling is that it can be difficult or expensive to find shares to borrow to short-sell because not all stocks can be shorted and certain brokerage firms limit your capacity to short-sell stocks. Furthermore, you may be charged a commission for shorting a stock, and you must execute your deal during market hours.

However, there are no constraints with futures because you can sell a futures contract at almost any moment and your fees will be small.

6. More efficient than the stock market

The stock market is full of information that a trader will never have access to, at least not in a timely manner, because news of corporate earnings shortfalls, bankruptcies, and other market news are frequently difficult to obtain through the stock channel, making it difficult for traders to get a fair shake trading individual stocks.

In the futures market, however, the only information available is the price, and every trader sees the same price activity in the market at the same time, allowing each trader to make their own conclusions.

Takeaway

The futures market is a highly liquid market that provides a wonderful way to hedge risks as well as the potential of leverage trading to increase your profits. The most appealing aspect of futures trading is the ability to manage and hedge risk.

FAQs

1.  How are stock futures prices determined?

Futures are priced based on the underlying market’s spot price plus any spread or commission paid to a broker for executing your deal. The factors of supply and demand also influence how a futures contract’s price moves, with stronger demand and lower supply leading prices to climb and lower demand and higher supply causing prices to fall.

2.  What is margin in futures trading?

Margin in futures trading allows you to open a CFD trade with a little deposit while gaining considerably larger market exposure. However, when trading on a margin, your final profit or loss is determined by the complete size of the position, not just the margin necessary to open it.

3.  Are futures more valuable than stocks?

While stock trading entails purchasing and selling the asset, futures trade only on the stock’s shifting price rather than the real stock. It is mostly employed for hedging and speculation.