Investing in Stock Futures: A Few Practical Tips

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What Are Stock Futures?

Most investors are familiar a variety of the best-known investment instruments: stocks, bonds, commodities, mutual funds and the like. Beyond those options for investing are stock futures. Just what are stock futures, and how do they work?

Stock futures are called that for a very good reason. Essentially the investor enters into a contract to purchase a particular stock at a predetermined price at some established future date. As this is only an agreement to purchase the buyer does not actually have ownership of the stock until the purchase is executed. That being the case there are no advantages of stock ownership such as dividends or the ability to attend shareholder meetings and vote as a shareholder or by proxy. On the other hand you don’t necessarily suffer a financial loss when the stock experiences a downturn since you don’t actually own the stock.

In the investment world stock futures are viewed as a high-risk investment. This is due to the fact that you are basically gambling that the price of the stock future will indeed be higher when the contract date comes around. You may be obligated to purchase stock that has dropped considerably in value taking a significant loss from your original purchase of that stock future. Of course similar to standard stock purchases the intention is that the stock future will appreciate in value resulting in at least a moderate profit.

Many stock futures are not retained until the agreed purchase date. This is where the buy and sell options for stock futures come into play. They are bought and sold on a regular basis, much as standard stocks are. In fact one stock future strategy termed “hedging” an investor may purchase stock in a given company, and also may purchase stock futures in the same company for a specific future date at a predetermined price. By  using this approach a loss in the stock may be offset – or more – by the value gained by selling the futures in that market. Note that stock futures are considerably different from stock options. Upon the sell or delivery date specified in the contract the holder is obligated to execute the purchase.

Use caution when starting to invest in stock futures. One attractive aspect in the futures market is being able to purchase a stock future for a particular stock at a lower price than you would pay for actual shares of the same stock. In contrast if your stock shares tank completely you lose your entire investment. With a stock future you could conceivably be required to purchase worthless stock at a price higher than you initially paid. This puts you in the position of losing your entire investment and even owing more.

How do you Purchase Stock Futures?

Stock futures can be purchased through traditional brokers and can also be acquired through an online broker. Day traders can invest in stock futures in much the same way as stocks but it will be imperative to monitor values closely to be aware of the best times to buy and sell. This is where research tools provided by online brokers can play a distinct advantage to day traders investing in stock futures. MarketWatch points out that financial instruments commonly traded through stock futures include stocks, treasury bonds, commodities, global currencies, and more.

Another consideration for investing in stock futures is setting up a managed brokerage account where the broker monitors the market and executes buy and sell orders without the client’s direct authorization. This implies that the investor trusts the broker implicitly and the broker has a detailed understanding of the client’s investment strategy and goals.

Commodity pools are a third way of investing in stock futures. In this scenario a broker manages a pool of assets from multiple investors similar to a mutual fund.

Stock futures are traded on multiple financial markets that include the UK, Spain, India, and the US. The single largest single-stock futures market in the world is currently South Africa. Stock futures can be monitored in much the same way as traditional stocks, updated on such internet sites as USAToday. Bloomberg also provides a convenient recap of futures markets.

How do Stock Futures Apply to Your Investment Strategy?

Based on the attributes presented here stock futures may or may not be the financial vehicles that apply to your particular investment strategy. As when purchasing traditional stock be certain to research the company or companies you’re considering thoroughly and continuously monitor futures markets for the appropriate time to buy and sell.

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Disclaimer: SureTrader Blog is not intended for U.S. persons. Stock information is not to be viewed as buy or sell recommendations.

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