THE FUTURES MARKET
Futures trading is what I might call trading in a parallel universe.
The word Futures comes into play because you are buying or selling a
contract today, that, if held past expiration day in the future,
obligates you then (and only then) to buy/sell the stock or commodity.
Until that point you have no obligation, you may buy and sell futures
contracts the same day or several days later or hold to expiration.
Since you don't want to buy the stock or receive 10,000 bushels of corn
in your driveway, we never hold them past expiration.
Note: I personally am not a big futures
trader preferring stock and options trading. Almost all (99%) of
my trading is in options. However, futures traders read the same
charts I do the same way I do. The risk are different in each
type of trading.
since it is heavily leveraged as explained below, is not for everyone.
It is possible to lose more than your original investment.
"Single stock futures (SSF) are futures contracts on individual
stocks. A single stock futures contract is an agreement to deliver 100
shares of a specific stock at a designated date in the future called the
expiration date (unless of course you sold it beforehand, you have no
obligation unless you are holding that contract after the expiration
date).** In most cases, four expiration dates are available for trading
single stock futures.
Margin requirements are generally 20% of the cash value of contract,
although this requirement may be lower if the investor also holds
certain offsetting positions in cash equities, stock options or other
security futures in the same securities account. (Unlike options,
with SSFs it is possible to lose more than
your investment because of the margin rules. You MUST
understand margin rules and risk before you trade futures.)
Because there is no uptick rule for products, you can establish a
short position on a downtick. Short sellers may also benefit from
eliminating the costs and inefficiencies associated with the stock loan
Security futures is the term
used to collectively describe futures on individual stocks, narrow-based
indexes and Exchange Traded Funds (ETFs). These products are now trading
in the U.S. and represent an important new tool for professional
traders. Security futures enable money managers, proprietary trading
operations and other investors to efficiently execute a variety of
trading strategies for U.S. listed equities.
When a security future is traded, both the buyer and seller put up a
good faith deposit called margin. Margin requirements are generally 20%
of the cash value of contract, although this requirement may be lower if
the investor also holds certain offsetting positions in cash equities,
stock options or other security futures in the same securities account.
Single stock futures (SSF) are futures contracts on individual stocks.
www.onechicago.com lists futures on more than 85 well-known stocks such
as IBM, Qualcomm and Microsoft. In late 2000, the U.S. Congress passed
legislation lifting the ban on these products, which were already
trading in Europe and elsewhere.
A single stock futures contract is an agreement for delivery of shares
of a specific stock at a designated date in the future, called the
expiration date. The size of a single stock futures contract is 100
shares of the underlying stock.
Narrow-based indexes (NBI) are futures contracts on small groups
of stocks that allow an investor to take a position in a concentrated
area of the equities market. OneChicago offers futures on Dow Jones
MicroSector IndexesSM which each contain 5 stocks in a focused industry
sector such as Aerospace, Banking, Biotechnology and Semiconductors.
ETF Futures are futures contracts on Exchange Traded Funds. They have
similar characteristics to single stock futures, although the underlying
security is the fund itself rather than common stock in a specific
company. Thus at expiration, the deliverable assets are shares in the
** Comments in parenthesis and italicized are mine.
The "fair value" quoted on TV refers to the relationship between
futures contract on a market index and the actual value
of the index. If the futures are above fair value then traders are
betting the market index will go higher, the opposite is true if
futures are below fair value.
Either you know
what you're doing or not.
Face it, the more you know, the better
Like options trading, trading futures may not be for everyone. There is risk involved and you should have a solid grasp of the rules
and risk associated with trading SSFs or any futures contract.
Consult your investment professional.
Don't even try futures if you don't understand the
basics, the risk, and the effects
of margin and leverage.
The links below have very good educational material regarding
Futures. In an
overall education regarding the markets you need to be aware of what the
futures market is and how it affects all the markets.