Stock Futures

Stock futures trading can be a very rewarding yet very risky thing to do. Basically a futures contract gives the buyer the right to lock in a certain price for the stock in the future. You can either buy a stock at a given price in the future, or sell a stock at a given price in the future. They each offer a unique way to make money in the market.

The biggest advantage to trading in the future market is the ability to use huge amounts of margin. You may only need to put down 10-20% of a contract in order to control the stock. For instance you may buy 100 shares of a stock trading at $100 and only put 20% down, or $2,000.

Now say that stock goes up to $105, this would normally make you $500. If you had the full $10,000 invested you would only be up 5%. If you had $2,000 down you would be up 25%. That is the power of the futures market.

However, buying on such high margin levels has its drawbacks. You greatly increase your risk. Very small movements can give you huge gains, or it can give you huge losses. Also you are not limited to lose only the amount you have invested in the position.

If you put 20% down on a $10,000 stock futures contract you pay $2,000. But you are not limited to only losing $2,000. You can lose up to $10,000 or 5 times what you originally invested. In addition to that you may be subject to margin calls if your position goes below a certain maintenance level.

While future contracts can be profitable, they can also be very risky. It is up to the investor to decide whether or not they want to get into that risk.