What is a futures contract?
A future contract is a consent between a buyer and seller for buying or selling a certain asset or commodity at a predefined price at a specific date and time in the future. In other words, the seller has to deliver the product to the buyer at the end of the time period. Although many future contracts offer cash settlement instead of delivering the asset. The stock market futures work through a specific code which makes it very attractive for the stock market traders. Now let’s discuss more elaborately about “what is a futures contract?” and “how do the stock market futures work?”.
Stock Market Futures Definition
The stock market futures help the traders to determine the future performance of its underlying assets, which in term reduces the market volatility. And for the past few years, the US market futures have been able to give the traders a clear concept about the upcoming up-downs.
How do the stock market futures work?
The traders buy the futures contracts for a specific period of time usually for one to three months which expires after that. But the traders can also roll over the futures contracts in the next expiration month according to their need. The buying and selling of stock market futures happen through the exchanges. Now if we talk about the US market futures the whole process is regulated by the Commodity Futures Trading Commission https://www.cftc.gov/. The exchanges play a very important role in clearing the unexecuted contracts, the contracts go through the exchange clearing hours where all the contracts get bought and sold into the market. The exchange also helps you to interchange a futures contract with someone before the expiration date, but the contract has to be of the same product and quantity.
The stock market futures are very useful for the commodity market also known as the commodities futures. Companies use commodity futures rates to agree upon a particular price for its raw materials such as Aluminium and Nickel. For example, when a sugar company like Tate and Lyle buys sugar from the market it looks up to the US market futures for identifying the future value of that product.
Types of Future Contracts
Now to completely know what is a futures contract and how it works we will also have to discuss the different types of futures contracts available in the market. Here I will mainly discuss three types of futures contracts-1. Commodity futures, 2. Forward contracts, and 3. Options.
The commodity futures play a very important role in the stock market futures. The main commodity market sectors are Metals, Food, and Energy. And now if we talk about the US market futures then crude oil is the most important commodity contract of it because the oil market directly or indirectly impacts the other sectors. Comparing with the capital market the commodity futures market is very volatile. And it takes a very good knowledge to invest in it.
The forward contracts are a specific form of the futures contract, and are made by taking care of the specific needs of the traders. The forward contracts can be a little different than common future contracts but they are mostly the same in nature.
A futures option contract is a different form of the futures contract. And it gives you the authority to buy or sell a futures contract. The options contracts are usually settled in a weekly basis, but one can hold it for a month or so. The options market is a very important instrument in the stock market futures and surely have to understand it well if you want to know about what is a futures contract.
The future contracts are very popular in the financial market and are increasing day-by-day. In the above discussions, I have covered the idea of stock market futures and what is a futures market which gives you a complete idea about these. I have also told you about how US market futures help the traders in identifying a stock’s future value.