Futures Trading
Futures are derivative contracts to buy or sell a stock or ETF at a future date at an agreed-upon price — giving traders the ability to hedge or speculate on equity price movements.
Futures Trading
Stock futures investing
Stock futures investing lets you trade futures of individual publicly listed companies and shares of ETFs. Futures contracts represent a significant part of the equity derivatives world, enabling traders to gain leveraged exposure to stock price movements without directly owning the underlying shares.
Some traders prefer stock futures because they can take a substantial position while putting up a relatively small amount of capital, giving them greater potential leverage than owning the securities outright.
Most investors think about buying a stock anticipating that its price will rise. But short-selling through futures lets traders do the opposite — bet that a stock's price will fall, so they can profit from the decline and buy back at a lower price.
One common application involves hedging equity exposure. Someone wanting to hedge exposure to stocks may short-sell a futures contract on the S&P 500 index. If stocks fall, they make money on the short position, balancing out their exposure to the index. Conversely, the same investor may feel confident about future performance and buy a long contract — gaining significant upside if stocks move higher.
What are futures contracts?
Futures contracts, which you can readily buy and sell over exchanges, are standardised. Each futures contract will typically specify all the different contract parameters:
The unit of measurement.
How the trade will be settled — either with physical delivery of a given quantity of shares or with a cash settlement.
The quantity of shares or units to be delivered or covered under the contract.
The currency in which the futures contract is quoted.
Grade or quality considerations, where applicable — for example, the class of stock or ETF unit type.
The risks of futures trading: margin and leverage
Many speculators borrow a substantial amount of money to play the stock futures market because leverage is the primary way to magnify relatively small equity price movements into profits that justify the time and effort involved.
But borrowing money also increases risk: if markets move against you — and do so more dramatically than you expect — you could lose more money than you initially invested. Futures are complex instruments and are not recommended for inexperienced individual investors without appropriate risk controls in place.
Leverage and margin rules in the stock futures world allow traders to control large positions with a fraction of the total value. The exchange sets the margin requirements. Depending on the contract, traders may be able to leverage their exposure significantly higher than in direct stock ownership.
The greater the leverage, the greater the potential gains — but also the greater the potential loss. A 5% change in stock prices can cause a highly leveraged position to gain or lose a much larger percentage of the invested capital. This volatility means that traders need strict discipline to avoid overexposing themselves to undue risk when investing in stock futures.
Futures trading carries significant risk of loss and is not suitable for all investors. You should only trade with capital you can afford to lose and should fully understand the risks involved before opening a position.
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