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Understanding Stock Futures

by gbaf mag

In finance, a stock futures position is a cash settled forward contract on the price of a certain stock index. The turnover in the foreign exchange in exchange traded stock futures is theoretically valued, for instance, at the Bank for International Settlements (BIS), at USD 130 billion. The contracts are traded on futures exchanges like the New York Stock Exchange (NYSE).

A stock futures contract is created when a person, firm or company decides to purchase stock from another company at a certain price in the future. At the same time, an agreement is entered into with the seller which stipulates how much, if any, additional shares will be issued between the two companies. The price agreed upon is determined at the time of the agreement. It can be a fixed price per share or an option-price per share. This contract is generally considered as a stock option.

If a person has purchased 100 shares at a fixed price on march 1st and then decides to sell these shares at a higher price on march 1st, he can sell his bond, stock, or mutual fund. As mentioned in the preceding paragraph, this will result in a realized gain or loss. However, if the bond, stock or mutual fund is worth more at the date of purchase, it would be a loss for the investor. Similarly, if a buyer decides to purchase 100 shares at a fixed price on march 1st, and decides to sell those shares at a higher price on march 1st, he would be rewarded with a realized gain.

There are different types of stock futures contracts. Most are cash settled, meaning that there are no upfront costs. The cost of buying or selling is generally not determined until the contract is executed. Some contracts stipulate that if the price rises before the settlement date, the seller will be liable to pay additional fees. Most cash settled futures contracts do not have any specified termination date.

The maturity date of the contract determines the option strike price. Cash settled futures contracts normally have ten or fifteen-year expiration dates. Option contracts also determine the premium to be paid by the buyer. Premiums are based on risk level; the higher the risk, the higher the premium.

Option trading, as well as stock trading, involve certain principles. A call option provides the buyer the right to purchase a stock at a specific price within a specified period. A put option gives the buyer the right to sell a stock at a specific price within a specified period. The price for both options may be negotiated beforehand. However, the strike price is typically set by the market maker, whereas the price for a futures contract is negotiated at the time of the transaction.

In order to exercise a call option, a buyer must buy a call option. The strike price will be set by the exchange on which the stock is traded. In order to exercise a put option, a buyer must sell a put option. When the expiration date of the contract approaches, the holder of the option may sell the stock or the option back to the market maker.

It is important to note that the price of the underlying security does not change during the course of the transaction. A futures trade is not considered open stock trading. Trading futures involves trading with cash or with a combination of cash and stock. Generally speaking, the price of the underlying security does not change during the course of the transaction.

There are many advantages of trading in the futures market. For instance, it provides the trader with a convenient and flexible means of securing short-term and long-term capital. It allows the trader to hedge his or her exposure to fluctuating prices.

A trader can benefit from the Futures market. For instance, a manufacturer can protect its stocks from fluctuations in the price of raw materials. A futures contract can also provide the trader with a method of hedging against fluctuations in interest rates. Additionally, when a manufacturer determines the price at which it will sell its products, he or she can use the information on futures prices to determine the amount it will charge for the stock.

A trader will need to consider several factors before deciding whether to buy or sell a futures contract. He or she should first evaluate the risk involved in trading futures. After evaluating the risks, the trader should still be able to make a profit if the price of the futures contract is lower than the price he or she would pay for the same stock in the open market.


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