I am a novice in the Stock Market arena but need to understand how futures work.|||Dear "Bedford":
Well I hope this is a school assignment because "futures" is no place for novices. Futures Trading is nothing more than a prediction of what value something will have in the future. For fun, watch the Eddie Murphy - Dan Akkroyd movie "trading places". You basically predict as in the movie the future value of Orange Juice and you place one or more bets on it. If you're right, you make gobs of money. If you're wrong, you end up like the Duke Brothers ... broke. Novice investors are like babies on the interstate. It'll be disaster and quickly.
You have certain gooferment enforced protections, but don't depend upon them to keep your money safe. In order to open a futures trading account, you will have to jump thru some hurdles. Your broker can be held liable if you can NOT pay for your losses (You can go to jail! They have to make good.) or if you are deemed "unsuitable" to play in that market (You get an nasty letter; they pay big big bux).
Assuming that you can deposit enough credits with the brokerage, you'll be admitted to the "big casino". I say casino advisedly because other than certain specific occasions, you'll get a better deal at the casino of your choice. The casino will at least buy you dinner when you play.
Futures Trading is appropriate for the average schmo, (that includes me), for example, when you are given options by your employer and you wish to lock in your gains. As your employer in BIGBIZ who shares sell at a penny, I grant you an option to buy 10,000 shares at a dollar each in December. BIGBIZ is "discovered" by Wall
Street and the stock zooms over night from a penny to $300. Shazam, you could be rich if it stays there until December. You being a smart fellow say "Hey good enough for me. May I have my profit now?" No, you have to wait unitl December. So you sell a CALL OPTION giving some one the right to buy your 10,000 shares for $3,000,000. Note, it's unlikely that you'll get the full $300 because the buyer is taking a risk. So let's guess that you can get $1.5M. So the question is "deal or no deal". The only diff is it is your real money you are playing with. AND, you have taxes to consider. Only a lawyer and an accountant can sacrifice the right number of chickens to read the entrails and divine the tax status of your transaction. AND, guess what the rules will be going forward. My opinion would be that you'd have to pay ordinary income on the whole shebang but what the heck. You'd come out on the other side with $750k. Lest you think that this is fiction. I have friend who had 40$ options on a stock priced at $120 who decide to take the ride and the options were worthless when he could cash out. To a much lesser extent, I've paid tuition at that school. Bye bye big bux!
Futures are also useful when you have stock accumulated say in AT%26amp;T over decades. And you're sitting at 80$/share with lots of shares, and your good son, (me), comes to you and says "sell". You say "never, it's fr widows and orphans". Argh! I say, "You think it's going up. Sell a put; requiring someone to buy it at 60 in the future and buy a a set of calls at 80,85,90, whatever." You say "nah". So I watch as you ride $80 times gobs of shares to $12 times gobs of shares. Argh!! bye bye big bux.
Futures are great if you a have specific purpose in mind. Here's a Futures Trading course on the web for free. And, the gooferment site. Stay out of traffic.
Let me know how you make out,
fjohn
Ferdinand J. Reinke
Kendall Park, NJ 08824
Webform that creates an urgent email =%26gt; http://2idi.com/contact/=reinkefj
Web page =%26gt; http://www.reinke.cc/
My blog =%26gt; http://www.reinkefaceslife.com/
LinkedIn url =%26gt; http://www.linkedin.com/in/reinkefj|||Tip: if you don't understand it, you're the guy whose money everyone else probably thinks they're going to get.
From memory from a finance class once upon a time, a long time ago:
'futures' is basically when I sell you an option to buy my stock shares at a certain price.
For example: if the stock is worth $10 today, I might sell you the option to buy the stock at $11 in a period of time, say 6 months from now. Or the reverse, the stock is worth $10 today and I sell you the option to buy it at $9 in a period of time.
In the first example, I am betting that the stock price goes down or at least stays under $11 so that I keep your money and my stock.
In the second example, I am betting that the stock price goes way down. Check with a broker, but I think this is called short selling and I think I might be able to force you to exercise the option to buy in this case.
In any event, when you deal in the futures market, you are betting, essentially, that you know more about the future value of the stock than the person on the other end of the transaction.|||Futures is selling the right to someone to buy something at a specified price in the future. SO, I might think that petrol will be VERY expensive in 6 months time, and I thenBUY THE RIGHT from a petroleum company to buy petrol at a specific price.|||A futures contract is simply an arrnagement to buy or sell a security (or anything) at a fixed price at some point in the future. So, if I am exporting from the UK to the US and expect to be paid in dollars in 1 month and want to ensure that I am not hit too hard by a rising pound then I would find someone who is willing to sell me dollars at a rate favourable to me. I might lose out in that it may turn out that the spot price is more favourable on the day I receive the dollars but at least my income is guaranteed.
Futures are traded on margins too, in other words you have to pay an inital deposit to the exchange and they just pay as prices change.
Try euronext http://www.euronext.com/editorial/wide/e鈥?/a>
There used to be substantial educational software on liffe but I don't know if it was carried over when liffe became euronext|||The best way to explain how futures work is to start with an explaination of an older (and now fairly rare) derivative.
A foward contract is an agreement to buy and sell something at a particular date in the future at a set price. The classic example is a farmer who agrees with a miller to sell corn six months from now at a certain price. No money changes hands when the contract is agreed to, only when the corn is actually delivered. Both sides are happy to lock in the price of corn today. Folks in my part of the world sometimes make deals like this for fuel oil to heat their houses, locking in a price for the winter in the fall.
The problem with fowards is you can't really make a financial market of them, since each side is taking a credit risk on the other side of the deal. The farmer has to trust that the miller will have the money to pay him and the miller has to trust that the farmer will have the corn. That makes it hard for either party to easily transfer their side of the deal to somebody else.
Futures are a modification of fowards that allow an active market. There are two big differences. First, the contracts aren't made with a single counterparty, but with the entire market. So the farmer doesn't sell the corn future to a particular miller but to the entire group of buyers of corn collectively and the market itself guarantees that the cash will be there to make good on the deal. Second, and this is the biggest difference, futures are marked-to-market every day. This means that as the futures price fluctuates each day a payment is made to/from buyers and sellers to settle out the difference. So, for example, if the futures price of corn goes up, then the farmer who sold the futures (or is "short" the contract) pays money and the miller who bought (is "long") the contract recieves money. If the price goes down the opposite occurs.
It is important to note the diffference between the futures price of something and the spot price. The two are obviously related, but only on the last or "expiration" day of the futures contract will they be identical. And on that day the final payment will be made to settle out the contract. The actual commodity or whatever that the contract was on does not usually change hands. A futures contract is almost always "cash settled".
When you open a futures account with a broker you put up some money for "margin". As you go long or short futures contracts the daily mark-to-market payments will be added/subtracted from this margin. If it gets too low the broker will ask you to come up with more money or to close some of your futures positions, i.e. sell if you are long or buy if you are short.|||You are guessing what the price for something will be in the future. Instead of buying a stock now at a certain price, you "borrow" the stock now and agree to buy it from someone at a certain price, after a certain amount of time. If the stock is worth more than the price you agreed upon (that is, if at that time everyone else is paying a higher price than the one you agreed to), you can sell the borrowed shares the higher price, then pay the person you borrowed them from the lower price.
For example, if a stock is selling today for $10, but you think in 90 days it will be worth $15. You would be willing to pay $4.99 to borrow each share (the price of your "futures"), because you think you will be able to make $5 when you return the borrowed shares, and make a profit of $.01 per future ($5.00 - $4.99).|||Future is a "promise" you make to somebody that you for example pay 10 Dollars for a certain stock in a specified time in the future, say 18 August .
The meaning that lies within is that you bet that in 18 August that the stock will cost ...let's say 20 Dollars. In that case if you sell it you earn 20-10=10 Dollars. But if it costs 2 Dollars, then you have lost 10-2=8 Dollars.
Future theory does not apply only to stock, but in the real estate markets, bonds...etc.
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