Stock Futures: What Is Futures Trading?

In stock futures trading, the buyer of an asset agrees to buy a certain quantity of product at a predetermined price and the seller agrees to pay the asset at the agreed price. With time, the value of an asset tends to change based on its price in the stock market, which also creates profit and loss for investors.

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What is Stock Futures?

Stock Futures are Financial contracts or agreements to buy or sell a specified quantity of an asset at a future date at an agreed price between buyer and seller. These assets can be shares of a company, gold, silver, commodity, equity, etc. Here, both buyers and sellers are obligated to honour the agreement. They do not have any intrinsic value their value is derived from that of an underlying asset.

Stock Futures: Key Takeaway

Stock Futures are agreements to buy or sell a specified quantity of an asset at a future date at a predetermined price between buyer and seller.
Changes in the value of assets over time create opportunities for loss and profit for investors.
Investors can generate profit even in a falling market by capitalizing on market sentiments.
Futures contracts are traded in the stock market.

Benefits of Stock Futures Trading

Some important factors to be considered while investing in stock futures trading are mentioned below.

Accessibility: To access the market, investors must meet the eligibility requirements and open a separate account specifically for futures trading.
Leverage: Investors can control a large position in the stock market with a small amount of capital. This leverage can become huge if the market moves in the speculated direction.
Speculation: Investors can profit from both upward and downward price movements by speculating on how the stock market’s prices will move in response to different factors.
Potential Higher Returns: Stock futures stocks offer higher return potentials due to their ability to capitalize on short-term price movements in the price. Also, the leverage on stock futures allows investors to hold a larger position in the stock market.
Market Transparency: A variety of online platforms provide information on stock futures and their constituent parts, enabling users to stay informed and make well-informed decisions.
Diversification: The futures market offers exposure to a wide range of asset classes beyond regular stock and bond investments. Investors can diversify their portfolios by trading in future currencies, gold, equity, commodities, etc.
Liquidity: Stock futures consist of high trading volume and high liquidity ensures investors can easily buy and sell securities without any problem finding a seller.

Benefits of Stock Futures for Sellers

Sellers can derive profit from stock futures check them out below.

Sellers can derive by selling their securities at a predetermined price when the price of the assets is declining.
They can manage risks effectively by selling their assets at a predetermined price on a specific date.
Stock futures trading can attract a lot of investors and traders to the company platform which results in increased trading activity.
Companies can also generate revenues from the fees charged for trading in futures contracts. The higher the trading volume, the greater the revenue potential.
By offering stock futures along with stocks, bonds and commodities these companies can offer a more diversified range to their investors.
By providing stock futures to their investors, companies can enjoy a competitive advantage in the financial services industry.

Disadvantages of Stock Futures Trading

Along with a number of benefits, stock futures trading also comes with a few disadvantages, as mentioned below.

They are more complex than the other trading stocks. Trading on the speculated price movement of financial assets can be complex.
Futures trading can have significant market risks, including price volatility and fluctuations.
Leverage position on the asset can also lead to magnified loss when the price of the asset goes down significantly.
Events such as economic data releases, geopolitical developments and other corporate announcements can lead to significant price gaps overnight.

How to Trade in Stock Futures?

Check some of the steps to trading in stock futures below.

Understand the workings of the futures market and get a strong hold on the basics and fundamentals of stock futures.
Must be aware of the risk factors of stock futures trading.
Now choose your futures market. There are many options such as stock futures, commodities, currency futures, treasury futures, bond futures, etc.
Create an investment strategy.
Choose a trading platform that suits your trading needs. Now place your first trade.

What is Stock vs. Futures Trading?

Let us check some of the differences between futures trading and stock trading in the table below.

Stock Futures Trading vs Stock Trading
Aspect	Futures Trading	Stock Trading
Underlying Asset	Commodities, financial indices, currencies, etc.	Individual company stocks
Contract Size	Standardized contract sizes determined by exchange	The number of shares is determined by the investor.
Leverage	High leverage, allowing control of large positions	Limited leverage (usually through margin accounts)
Expiry Dates	Fixed expiry dates (monthly/quarterly)	There are no fixed expiry dates
Settlement Method	Physical or cash settlement, depending on the contract.	Physical settlement (delivery of shares) or cash
Trading Hours	Limited trading hours (depending on exchange)	Regular market hours
Market Regulation	Regulated by commodity futures exchanges	Regulated by securities exchanges
Risk Exposure	Exposure to price fluctuations of the underlying asset	Exposure to price fluctuations of individual stocks
Margin Requirements	Margin required for trading	Margin may be required for margin trading accounts
Liquidity	Varies depending on contract and market activity	High liquidity in major stocks; varies in others
Contract Flexibility	Limited flexibility due to standardized contracts	Flexible trading strategies

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Stock Futures FAQs

What is Stock Futures?

Stock Futures are Financial contracts or agreements to buy or sell a specified quantity of an asset at a future date at an agreed price between buyer and seller.

What are the two major types of stock futures traders?

The two major types of stock futures traders are hedgers and speculators.

How to do Trade Futures?

Check the steps for futures trading below.

First, know the stock market fundamentals.
Pick a futures market of your choice for trading.
Create a Demat account and create your account
Place your first trade.
Set your stops and limits
Monitor your positions
Close your positions.

What are overnight risks in Stock futures trading?

In futures trading, events such as economic data releases, geopolitical developments and other corporate announcements can lead to significant price gaps overnight.