Topic: Value Stocks

Learn about the ins and outs of stock futures today and you will save yourself some losses tomorrow

Investing in stock futures today can lead to big losses tomorrow, especially with higher fees associated with these speculative investments. Learn more now.

Stock market futures are legal contracts to buy assets at a specific price at a specific date in the future. Futures differ from stock options because they are a binding commitment to purchase rather than the opportunity to do so.

When you trade stock market futures today, or any day for that matter, you are betting on the direction and speed of coming price changes. Nobody consistently wins these bets. Sometimes you guess right and sometimes you guess wrong, but you pay commissions and fees with every trade. You may feel you have a knack for predicting changes in prices of stock market futures.

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Understanding the ins and outs of stock futures today

When you buy or sell a futures contract, you commit yourself to the purchase or sale of a specified quantity of a particular commodity (or currency or financial instrument or other asset) at a future date. The date and quantity are standard; you fix the price when you buy or sell the contract.

In theory, high leverage makes it possible to turn a modest stake into a fortune in stock futures today. In practice, however, most stock market futures for tomorrow (meaning at some point in the future) wind up losing money.

Successful investors recognize that investing in stock futures today is a form of recreation. You may do it for fun, but don’t count on it for profit.

Here’s how stock futures today work

Trading in futures is a long-established and perfectly legal way to bet on price changes in commodity, currency and financial markets. This attracts futures traders.

Here’s an example: The first futures were in commodities, which offer a clear example of the way futures trading works. Say you purchase a March wheat contract at $6.60. That means you’ve agreed to a contract for 5,000 bushels of wheat in March, paying $6.60 each, for a total of $33,000. The seller has agreed to sell that much wheat at that price on that date.

Since the transaction takes place in the future, the buyer and seller only put up a deposit of perhaps 5% of the $33,000. This provides enormous leverage. A 5% price rise represents a 100% gain for the buyer and a 100% loss for the seller.

Futures started out as a convenience for commercial interests. Farmers sell wheat futures to fix their income from this year’s harvest. Bakers buy wheat futures to fix their flour costs. But most futures transactions take place between speculators who are simply betting that prices will rise or fall. Most contracts get closed out prior to delivery.

Many futures traders start out burdened with the belief that they can predict these price changes. Most come to see they were wrong. The reason is simple. The markets determine price changes, and there are extremely intelligent and hard-working people on both the buying and selling sides of every futures market. As a result, most of the time, prices are about where they should be, based on existing information.

Of course, new information comes along every second of every day. No one can consistently predict if the next tidbit of info will push prices up or down, or how much of a push it will deliver. However, professional futures traders have a big advantage over amateurs and hobbyists, just as in every other field.

Here are three reasons to stay away from stock futures today—or any day

  • Futures contracts have a fixed life, usually under one year. You can hold stocks or mutual or exchange-traded funds indefinitely.
  • Futures contracts do not give you any income. Some stocks and some funds do provide dividend payments.
  • Futures are a speculation—a bet on price movements. To make money, you have to outguess other players by a wide enough margin to pay commissions. Stocks and funds are an investment because they let you profit from economic growth. 

Use stock futures today as a trading strategy and you can expect high fees 

Participants in futures trading systems do at times make high profits, of course. That’s because futures give you access to high leverage, which leads to extreme outcomes. The outcome of any one trade is subject to a high random influence. However, random events tend to occur in bunches, so you’ll experience both winning and losing streaks.

Of course, you’ll pay high fees and expenses, regardless of results. 

Use our three-part Successful Investor approach before making any investment decision, including ones that involve stock futures today

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight.

 Some investors believe that investing in futures increases stock market volatility. What are your thoughts on this?

Have you invested in futures at any point in your investing career? How did it turn out?

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