Futures --> What is it/ How is it important ? i still cant use it correctly

[WiqqyNYU]

I dont understand the concept of futures. When i google it, futures contracts come up but thats something else.

SO what is this futures thing? How is it calculated and how can i use it to understand "tomorrow"? waking up at 3am... for what?

excuse my ignorance :cool2:

[Tim Towasnicki]

I hope this helps.

Example: Notice when you buy a doughnut, the price stays the same on that doughnut for a fairly decent period of time. All of the ingredients that make up that doughnut (eggs, milk, etc) constantly change in price on the market. To ensure that the price of that doughnut stays the same, the baker will purchase something called a futures contract. A futures contract is a contract between a buyer and seller that specifies what good will be exchanged, at what price, for what quantity, and when the buyer will take delivery on that good. That way, the baker knows exactly how much of a good he will be getting and can adjust the price for the long term, since he knows how much of what he will be purchasing in the future. Hence the name, futures contract.

In stock market terms, I commonly watch the S&P futures. If the S&P futures are trading lower than unchanged, the S&P Index will open up lower. If the S&P futures are trading higher than unchanged, the S&P will open higher. The reason people watch those all night could be for strategic purposes of planning the next day, deciding whether to trade pre market, or other misc reasons. They are an indicator for how the market is going to run.

You have to be careful though when looking at them. I've seen S&P futures trade 16 ticks weak at 3am, and then trade 3 ticks strong at the open of stocks. They can change pace very quickly, so be careful.

This is a very general explanation, so if you have any detailed questions, send me a private message and I would be more than happy to go a little bit further.

Tim

[Bolimomo]

I dont understand the concept of futures. When i google it, futures contracts come up but thats something else.


I think you may want to pick up a book on financial futures instead of relying on google everything. Or read some at Borders, Barnes and Noble or your nearby public library.

In short: Futures is an instrument for the transfer of risk - from one party to another. The buyer and the seller. Historically futures were used for commodity products (grain, cotton, etc.) because the farmers wanted to hedge their risks. They want to protect their future profits. The speculators are the one who would absorb the risk and take the premium. Same thing as buying/writing insurance policy.

They extended futures to financial indices decades ago (S&P and Dow, etc.). Some big mutual fund managers may want to reduce their exposures (from their stock holdings) so they sell S&P futures. Kind of like buying put options. Without selling their holdings. Others may want to buy because they speculate thay the index will go higher.

Why is it important? Because index futures move FAST. Many participants buy/sell them left and right, especially when some kinds of news break out. Index futures (especially the S&P) often are regarded as the stock market's leading indicators.

[pedrom727]

The futures aren't just calculated out of nowhere in the morning. I think you have a misperception. They are actively traded 24hrs a day during the week, with a pause at 4:15pm. They then close on Friday at 5pm and reopen on Sunday at 6pm. They allow people across the world to add to or reduce their exposure to whatever the particular future is tracking, and thus any off hours news will be factored into the price. Whatever the value of the futures is right before the open, plus or minus fair value (the disparity between the future and the index on close), is what we open at, although it's still an estimate as there are so many trades coming in and different stocks in the index open in slight delays as well.