| Stock futures trading are a way to hedge yourself in | | | | nature, will also be highly risky. The same is true for |
| stock trading. Put simply, this type of a transaction is | | | | stock futures trading. Let us compare the scenario of |
| defined as the one where you agree to pay a seller | | | | an investment in traditional stocks versus investment |
| a specific price for a specific amount of stock that | | | | in stock futures. |
| you buy from him on a particular date in the future. | | | | When you buy stocks of a particular company, you |
| On the other hand, stock futures trading is an | | | | will need to pay the current price of that specific |
| investment option and these can be traded on the | | | | stock. If the price of that stock declines, at which |
| markets in a manner similar to ordinary stocks. This | | | | point you sell the stock, you will make a loss to the |
| type of trading is usually conducted on a margin | | | | extent of the difference in your purchase and selling |
| basis, that is, you only pay a small part of the price | | | | price. |
| of the stock when you enter into a contract. | | | | In the case of stock futures trading, you undertake |
| What Are The Benefits? | | | | margin trading and therefore, buy a much larger |
| This is an important investment avenue, open to | | | | portfolio or a larger number of stocks than in the |
| investors for hedging their risky stock purchases. | | | | case illustrated earlier. If the price of the stock then |
| They can go short on such future contracts, implying | | | | declines, you are faced with a situation where you |
| that they sell the stock before they actually own it. | | | | would lose most of your initial investment and will |
| They can also go long on such future contracts. | | | | also owe money to your broker. In this case, you are |
| Being margin based, this form of trading allows an | | | | required to make good the loss, and this can put a |
| investor to buy a large portfolio of stocks with a | | | | severe strain on your financial position. |
| comparatively smaller down payment as compared to | | | | Additionally, in contrast to the situation where you |
| traditional stocks. | | | | own physical stocks of a company, in stock futures |
| Options available to the investor are much more than | | | | trading, you do not have any rights of stock holders. |
| if you invest in traditional stocks. You can go long and | | | | You are therefore not entitled to any dividend or |
| short on the same stock. You can work on a | | | | bonuses, which the company might announce, nor will |
| calendar spread, wherein, you enter into a contract | | | | you have any voting rights. |
| to sell the stock futures you have bought a month | | | | Stock futures trading are an exciting investment |
| from now, and again enter into another contract to | | | | avenue; however, you can easily burn your fingers, |
| buy the same stock three months from now. | | | | so does your research well before you step into this |
| Disadvantages | | | | arena. |
| Any high return investment avenue, by its very | | | | |