Investing in stock futures can provide you with an alternative to simply investing in the stock market. If you are looking for a way to branch out and experience another type of investment, you might want to take a look at stock futures. Here are the basics of stock futures and how they work.

Stock Futures

A stock futures contract is an agreement between two individuals to purchase or sell a certain amount of stock at a given price on a certain date. When a futures contract is created, an actual stock transaction is not really occurring. Instead, you are agreeing to a transaction that will take place in the future.

How They Work

One of the best ways to understand how stock futures work is to imagine that you are trading a physical asset. For example, let's say that you owned a bakery and you need to purchase a certain amount of wheat over the long-term. You know that you are going to need this wheat one year from now. You also see that the prices of wheat have consistently gone up over the long-term. Because of this, you want to lock in the price that is available in today's market. You find a wheat farmer that is willing to sell wheat at a fair price. You come to an agreement with the former that they will sell you a certain amount of wheat one year from now at a specified price. With the stock market, the same basic principle applies. You tell someone that you are going to purchase a certain amount of shares of stock on a certain date at a specific price. When that day comes, you will give them the money and they will be be the shares regardless of what the price is in the market at the time.

Purpose

One of the main reasons for doing this is to avoid fluctuations in the market. If you are worried that the price of a security is going to go up substantially in the future, you might work out a futures contract with an individual to take advantage of the situation. This way, you will be able to lock in a more reasonable price without worrying about what goes on in the market. From the seller's perspective, this is a potentially good deal as well. They do not know what the prices of the security that they own will be at in the future. By agreeing to a futures contract, they will be able to guarantee a fair price for their shares in the future.

Secondary Market

Once you have created a futures contract, you will also be able to trade it in the secondary market. Futures contracts are regularly bought and sold on the open market. For example, if you own a futures contract that has a low price on a stock and the price of the stock increases, your futures contract would be very valuable.

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