Stock Future Trading

Stock futures trading may relate to single-stock futures or stock indices futures. In either case, the investor, or buyer, is indulging in pure speculation, and here's why. Stock futures trading concerns a sale, at a future pre-determined date, of financial instruments that may or may not have risen in value by said date. It's a pure bet.

For the seller (trader) in this transaction, contracting to sell these stock futures hedges the bet he originally made. He's assuming the risk that these stock futures won't rise above the price he and the buyer have agreed upon.

Stock futures trading contracts are pretty much standardized so that the period between the negotiated sale (trade) and the delivery date of the underlying asset may be either a month or a financial quarter. The due date, or expiration date, is always the third Friday of the final month of the trade.

Another reason for the standardization of stock futures contracts is to make them more negotiable on the exchanges where they are bought and sold, because everyone knows what the terms are. Among these terms is the standard proviso that each future equals 100 shares of actual stock.

Although stock market futures can be sold on a secondary market, in many cases the original seller will buy back the futures rather than delivering the stock on the expiration date of the contract. This is a market that particularly appeals to day-traders, who seem to be into quick turnarounds, accelerated heart rates, and high blood pressure.

Stock futures trading began in Europe and Asia quite a while ago, but wasn't permitted in the U.S. until recently. A number of U.S. exchanges exist in support of stock futures listings, including the Chicago Mercantile Exchange (CME), OneChicago, an all-electronic exchange, and the Chicago Board Option Exchange (CBOE). One reason their numbers are unusually high in Chicago is that futures trading used to consist primarily of agricultural commodities and the original "Windy City" was the nation's hub of that commerce.

In stock index futures trading, buyer and seller are betting on an overall trend, across the board, either up or down, of, say, the Dow Jones Industrial Average or the Standard and Poors 500. Dozens of online brokerages will handle these and single stock futures (SSF) transactions for an astonishingly low fee per transaction.