Stock Futures Conracts 101

Investing in stock futures is a popular alternative to investing directly into the stock market. Stock features can provide you with several different benefits and features when compared to traditional stock. Here are the basics of stock futures and how stock futures contracts work.

Stock Futures vs Stock

In order to understand how stock futures contracts work, you need to understand the differences between stock futures and traditional stock. When you purchase stock, you are going to be buying partial ownership of a company. You are going to receive voting rights for the company for each share of stock that you purchase. You are also going to receive a dividend for each share of stock that you own whenever a dividend is issued by the company. You can trade traditional stock with any stockbroker and any type of account.

With stock futures, you are going to be dealing with a different type of security. Although stock futures are influenced by stock prices, they are not the same thing. When you buy a stock futures contract, you are not actually purchasing any ownership in the company itself. You also will not be entitled to any dividend payments from the company. In order to purchase a stock futures contract, you may have to work with a special broker and have a certain type of brokerage account.

Contract

The idea behind a futures contract is simple. You are basically come to an agreement with another individual to purchase stock in the future. You find a seller that wants to sell a certain amount of shares of stock. Instead of purchasing them immediately, you come up with a contract between you and the seller. You tell the seller that you are going to buy 100 shares of Corporation X exactly six months from today. You also come to an agreement that you are going to pay $2 per share for the stock. Whenever the date comes six months from now, if you still have a contract, you will pay that individual the agreed-upon amount and they will give you the stock that they promised.

Trading Futures Contracts

With this type of security, you do not have to originate a futures contract in order to get involved. You can actually buy and sell stock futures contracts on the secondary market. For example, let's go back to our previous example. After you made the contract, the value of Corporation X stock shot up to $10 per share. You have a contract that says you can buy shares of the stock for $2. This means that you would be able to sell your contract at a premium.

Leverage

One of the common features of a futures contract is that you can use leverage. For investors that like to utilize leverage when investing, this is going to be one of the easiest ways. If you try to purchase real stock with leverage, you are essentially borrowing money from your broker. With this type of transaction, you are not actually buying any stock so you can usually just give them a deposit.

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