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Tuesday, June 8, 2010

Stock Market Futures

Stock futures are a high risk type of futures stocks, in which the underlying asset is an individual stock. Such futures stocks contracts involve buying or selling a specified quantity of shares at an agreed price on a specified date. Like all futures contracts, stock market futures have standardized specifications such as the market lot, expiry date, price quotations and methods of settlement.

Single stock futures endow investors with an opportunity to trade futurescontracts on an individual stock that is either traded on stock exchanges or on a basket of stocks within selected sectors. Be it for buy-writes, speculating, pairs trading or hedging, investors can add single stock futures as part of their financial tools. It will facilitate higher levels of diversity, flexibility and versatility. They also offer a cheaper alternative for an investor to invest in equity markets. Examples of such well-known stock futures include eBay and IBM.

How do Stock Futures Work?

For trading in stock futures, it is necessary to register with a registered broker. Signing up an agreement form is the first step. The next step is todeposit the initial margin upfront and begin trading in futures stock. The price of the futures usually depends upon the demand and supply of the underlying stocks. Normally, futures prices are higher than the spot prices.

Benefits of Stock Futures

· Stock futures provide investors with a higher leverage and a long term view of the underlying stock.

· Stock futures enables an investor to take large position with less capital.

· Stock futures provide opportunities to arbitrage or risk-less profit.

· Single-stock futures serve as a highly capital efficient and risk management tool that helps investors to participate in equities.

Risks of Stocks Futures

· Stocks futures are not suitable for all investors. Only those investors who have sufficient exposure to the investment market are advised to get into this field.

· Futures stocks trading are extremely risky as they are highly speculative. So, a wrong calculation may result in huge losses.

· Those who hold single stock futures are not eligible for receivingdividends.

Despite these risks, the benefits offer greater opportunities in participation and risk management, which make stocks futures an attractive investment for investors.

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