Stock futures are standardized financial contracts obligating the buyer to purchase, or the seller to sell, a specific stock or stock market index at a predetermined price on a specified future date. These contracts derive their value from the underlying asset, which can be individual company shares or stock market indices like the S&P 500, Dow Jones Industrial Average, or Nasdaq
. Key characteristics of stock futures include:
- Obligation to transact: Unlike options, futures contracts require the buyer to purchase and the seller to sell the underlying asset at the contract's expiration, regardless of the current market price
- Cash settlement: Most stock futures are settled in cash rather than physical delivery of shares, meaning the difference between the contract price and the market price at expiration is exchanged
- Expiration dates: Stock futures have specific expiration months (e.g., March, June, September, December), with the nearest expiration called the "front-month" contract
- Trading venue: They are traded on organized futures exchanges, which standardize contract terms and provide liquidity and transparency
- Use cases: Investors and traders use stock futures for hedging against price movements, speculating on market direction, or gaining exposure to a market or sector without directly buying shares
- Risk and margin: Futures require margin deposits and involve daily marking to market, meaning gains and losses are settled daily, which can lead to losses exceeding the initial investment
In essence, stock futures are derivative instruments that allow market participants to lock in prices for stocks or indices in advance, serving as tools for risk management, speculation, and market sentiment indication
