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.
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.