What are stock market futures?


Quick Answer

Stock market futures are exchanges of assets between a buyer and seller in which an investor agrees to purchase an asset or a seller agrees to release it to a buyer at a pre-determined future date. Futures can be either physical commodity items or financial assets, states Investopedia.com. The arrangement of the buying and selling agreement is written in a futures contract, which specifies the quantity, time and delivery method of the asset.

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Full Answer

Futures contracts are praised for bringing stability and predictability to the stock exchange market. Upon signing an agreement, a buyer and seller guarantee a physical delivery of the item or an exchange of cash. Futures are similar to options, with the exception that the signing parties have a contractual obligation to fulfill their duties in a futures arrangement, states Investopedia.com.

Futures contracts can be either short-term or long-term arrangements, and they can be set up as hedging or speculative tools. Hedging means that investors set an established buying price for a commodity, which reduces the risk of loss. In speculative arrangements, buyers watch rising and falling costs of a commodity before offering a price.

Futures contracts are present in many different markets, but these markets have different requirements for standardizing their contracts. Common provisions include setting a time, quantity and delivery method for items. Markets also specify a currency for the exchange and may have provisions for contract revisions.

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